Financial columnist John P. Napolitano says it could be time to do so. Follow the link to see his advice. If you want to contact John, email him at firstname.lastname@example.org.
I was recently poring through some statements from corporate 401(k) plans, and noticed a very large proportion of the participants' retirement investments are sitting in cash. The good news is that these workers are not losing any money due to volatile markets, but they aren't gaining, nor do they have a possibility of gaining while sitting in cash either.
The temptation is great. Each week you see the value of your 401(k) dipping. Even your current contributions don't seem to be enough to get the account balance higher. And this is typically when the average 401(k) contributor capitulates, and moves everything to cash.
I think you know my reaction to all you 401(k) cash kings. The paltry low yield you are currently receiving on your balances is barely above break even. Inflation, while still quite low compared to historical norms, is still eating away at your purchasing power. This is having the impact that makes your spending power lower each year as long as the inflation rate is higher than your cash yield.
An alternative to hiding out and waiting for the markets to stabilize is to dollar-cost average every pay period into the plan. Most 401(k) custodians will allow you to set some automatic rebalancing and investment features within the plan so you can remove the emotion of volatile days and dreadful headlines. You can, for example, decide to rebalance your holdings on a regular interval - that is, executing the buys and sells needed to bring your account back into the desired proportions of stocks, bonds and cash. As positions within the account rise and fall, their relative weighting changes, which may cause the portfolio to be more or less risky than desired. Many successful investors implement a regular rebalancing strategy at fixed intervals, such as quarterly or annually.
A similar move can be made if your plan is heavily invested in cash. There is no need to dump the cash today and put it all into riskier positions. The plan should be able to accommodate regular, systematic investments in a specified interval until you arrive at the desired allocation. In fact, 401(k) plans have the unique advantage of inherently dollar-cost averaging as most participants make their contributions evenly throughout the work year.
If you don't like the investment options inside your plan, talk to the plan trustee. The trustee may consider changing the plan sponsor or simply adding a few new investment choices. If that is not an option, perhaps the trustee is willing to amend the plan.
John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at email@example.com.