When it comes to 401k's there is an overabundance of sad 
stories. Here is one that at least has a happy ending—and it's 
getting happier all the time.

Last year (in 2002) a friend of mine—let’s call him Jack—phoned 
and asked if I could help him with his 401k. Jack works for a 
large company as Senior VP of lending and is financially pretty 
astute. However, when it came to his 401k mutual fund decisions, 
he had repeatedly made the same mistake most people were making. 
As a result, he saw his account drop in value substantially.

At the time we were in the midst of the 2000 bear market, which 
showed no sign of letting up. Jack had purchased into a Lifestyle
fund because someone recommended it. By the time he finally 
bailed out, it cost him dearly. However, he continued to make 
the same mistake by reinvesting.

He checked with the 401k representative and subsequently 
switched to a variety of mutual funds ranging from World Stock 
to Domestic Hybrids, Large and Small Value as well as Growth. 
But nothing worked and his portfolio value headed further south.

By the time we met to discuss his 401k Jack was pretty disgusted 
by the canned advice he had received and the continued losses he 
was sustaining.

Jack knew that I had pretty much eluded the bear market of 2000 
by having sold all of my clients’ positions on 10/13/2000. We 
were safely in our money market accounts weathering out the 
storm (see my article "How we eluded the bear in 2000."

Thinking about this, Jack could only shake his head because at no
point in the market slide had he ever been given what I believe 
was the right advice. That is, no one suggested that, since we 
were in a bear market, he might want to step aside and remain in 
the safety of his money market account. So he stayed invested, 
hoping against the evidence all around him to find something that
was not crashing. That was his mistake, and one shared by many.

The advice that he consistently and continually received was 
that the market was close to a bottom, stocks “have to” move up 
from these levels, and, my personal money losing favorite, “the 
market can’t go any lower.” That's what people wanted to hear 
and believe. But my tracking system said otherwise, and I 
followed its indicators—much to the delight of my clients.

Jack wanted to know how I could help. Looking at his mutual fund 
choices I realized that they were actually pretty decent, and he 
had a variety of some 13 funds. So, what was the problem and how 
could we solve it? In a way, the answer was simple. But people 
were having to get pretty beat up before they would see it.

My first step was, with Jack's permission, to log on to his 401k 
web site. Then I started making some adjustments. Since my trend 
tracking model was still in a Sell mode, I liquidated all of his 
positions and moved the proceeds into money market. This 
accomplished one thing right away: He stopped losing money. When 
you stop moving backward, in relation to everyone else you are 
moving forward!

Second, as my trend index moved into a Buy mode on April 29, 
2003, I researched his funds again. Based on strong momentum 
figures, I invested in two of his mutual fund choices. The 
result was very gratifying: the funds I chose moved up around 
10% in the two months after my Buy. (Other funds I had tracked 
and selected for other types of investment programs moved up 
as much as 26% in that period.)

Jack’s been happy ever since. While the 10% appreciation is 
not as great as I was able to do with assets outside his 401k, 
it still confirms that the key to successful investing is 
methodology and discipline. Our disciplined approach relies on 
objective information. It disregards Wall Street hype designed 
to perpetuate commission-rich buy now while it's low, or buy 
and hold strategies.

If you have been in a situation similar to Jack's, or you want 
to avoid being in one, find an investment advisor who bases his 
decisions on a measured and objective approach. That will give 
you the edge no matter whether the market is going up or down 
and will give you the greatest protection from sad stories with 
your 401k.

© Ulli G. Niemann