Alpha Power Investing Newsletter

June 30, 2010

401(k) WealthEngine

The average American worker knows virtually nothing about investing and yet is expected to build and artfully manage his/her own retirement plan over the course of a working lifetime. Typically, 401(k) participants get their investment strategies willy-nilly from brokers, relatives, co-workers and plan "education" vendors. The 401(k) "education" business is mostly a dumbed-down version of modern portfolio theory; namely, own a diversified portfolio of stock funds, bond funds, and cash; overweight stocks for higher long-term returns (more if you're young, less if older) and hold on. As a result, 401(k) accounts are mostly ignored, under-funded, and suffer from perennially poor investment performance.

401(k) investors stand a chance of half-way decent returns if they happen to be in the early stages of a long-term secular bull market, like 1981-1999. When the S&P 500 is compounding at 15%+ year after year and bonds are not far behind, it's hard not to get something worthwhile out of the investment mix no matter how poorly you're dabbling at it or even if you're asleep.

Those days are gone, however, and we're in a new era. With interest rates at rock-bottom, the bond market will not be a source of outsized capital gains, as it has been for the past 25 years. The stock market is historically expensive today, unlike 1981 when the dividend yield on the S&P 500 was over 6% and the ten-year trailing P/E ratio was 7. Today the yield is less than 2% and the ten-year trailing P/E ratio is about 20. No secular bull market has ever started at this high level of valuation. In fact, over the past 100 years, the market has spent 90% of the time at valuations less than today's.

This is a disastrous scenario for self-directed retirement accounts managed on principles that assume that the stock market and the bond market will generate positive and robust inflation-adjusted returns over the next 10-15 years.

Therefore, I have started a service for 401(k) investors which I believe will allow them to successfully navigate the ups and downs of a long-term secular bear market which may trend sideways for many more years (such as 1901-21, 1929-1949, 1966-1981, 1999-?). This service is called 401(k) WealthEngine and can be found on the web at

If you or someone you know is struggling with the investment management of a self-directed 401(k), 403(b) or other plan, please take a look. Actually, you can use this service to manage your own IRA or personal account (or call us and we'll manage it for you).

Our strategy is called The 401(k) FormulaTM. It is based on the four-year election cycle and the annual forecasting cycle. It is easy to understand, supported by 60 years of data, and has historically done a great job of risk management. Essentially, The 401(k) FormulaTM targets 14 months every four years to avoid the stock market. These months, which occur between May and November, contain 75% of the bear market damage suffered by the market since 1950.

The 401(k) FormulaTM is combined with the investor's age to create a progressively more conservative investment strategy that still exceeds 10% per annum even at the oldest age category (70+, 13.1%, 1995-2010). The website shows the details of past performance by age category.*

We are already deep into a retirement system crisis. Corporate and government defined benefit plans are under-funded and struggling to stay afloat. 401(k) account balances are nowhere near the values needed for effective income production in the typical worker's retirement future. It will get worse because the investment prospects of the buy and hold philosophy, which dominates today's thinking, are exceedingly poor.

Jerry Minton, Ph.D.

*Past performance is not a guarantee of future performance. Please see the website for important disclosure information.

© 2010 Alpha Investment Management Inc.

Alpha Power Investing Newsletter Archives