2015 really was the year that “nothing worked.” Stocks, bonds, cash, real estate, commodities… none of the major asset classes you’re likely to find in your 401(k) plan actually made money.
And if today is any indication, 2016 is getting started on the wrong foot. All major world markets were down sharply on the first trading day of the year after China released lousy factory numbers.
But before we start 2016 on a downer, remember that your 401(k) plan is more than just an investment account. It’s also a valuable tax shelter. In fact, I would argue that, for the average American, the 401(k) plan is the single best tax shelter in existence.
Even if our investment returnrns are completely flat, we still earnrn a “returnrn” equal to our marginal tax bracket. If you’re in the 25% marginal tax bracket, you effectively earnrned 25% on your money the second it hit your account. And I’ve said nothing yet about employer matching. Depending on the generosity of your employer, you might have earnrned an additional 3% to 6% in matching.
So let me be clear: while things don’t look good for the stock market this year, I’m as enthusiastic as ever about the value of your 401(k) plan. You should stuff every last dollar you can into your plan this year, even if it just sits uninvested in cash.
And about that cash… in my quarterly Dent 401k Advisor, I allocated my model portfolios exceptionally conservatively going into 2016, which is consistent with Harry’s forecast for the year.
I move a little slower in Dent 401k Advisor than we might in Boom & Bust because it’s a different kind of newsletter, intended for a different portion of your nest egg. A lot of investors aren’t comfortable trying to aggressively time the market with their company retirement plan. So while we might get completely out of the market in one swoop in a trading newsletter like Boom & Bust, I tend to recommend moving in stages in Dent 401k Advisor. That’s why we’re still 30% invested in the market here rather than completely market neutral as we are in Boom & Bust right now. It’s best you adjust your 401(k) plan sooner rather than later, so don’t delay.
We’re starting this year by looking to add a REIT fund into your 401(k) mix if your plan offers one. I consider REITs relatively cheap going into 2016. They didn’t have a 2008-caliber meltdown in 2015, like other sectors did, but they did spend most of the year drifting lower. This was due mostly to fear of the looming Fed rate hike, which was massively blown out of proportion.
Higher interest rates do hurt REITs in that they make it more expensive to borrow money to buy property, which cuts into profits. And secondly, higher rates on competing investments – like bonds and CDs – make REITs comparatively less appealing.
But the market seemed to price in a much larger series of rate hikes than seems plausible given the shaky state of the economy. And Janet Yellen made it pretty clear that she would be going slow with any additional hikes in 2016. So all of the Fed angst surrounding REITs was really much ado about nothing.
So, if your 401(k) plan has a REIT fund, consider adding it to your portfolio. For how big an allocation it should get, I publish the quarterly Dent 401k Advisor for Boom & Bust readers. To learnrn more about these newsletters, check out our premium research page.
Happy New Year,
Editor, Dent 401k Advisor