Somehow, despite the S&P 500 and Dow Jones Industrial Average setting new all-time highs, 2014 has been something of a lackluster year in the markets.
Economic data and earnings results haven’t exactly lived up to the expectations implied by last year’s 30% returns. With earnings season almost over, about 76% of the companies in the S&P 500 have beaten analyst estimates. And those estimates were not particularly high to begin with; Bloomberg expects S&P 500 revenues and profits to rise by 4% and 7.2%, respectively, in 2014.
Meanwhile, GDP growth in the first quarter was barely above zero, and the labor force participation rate continues to drift into generational lows.
The S&P 500 is up a couple of percentage points, but we’re now entering the months that have historically shown the weakest returns. Using S&P 500 data for the January 1950 to March 2014 period, average monthly returns for the May to October months is just 0.23% compared to 1.16% for the November to April months.
With all of this in mind, what should American investors do with their 401k plans? For most middle-class Americans, the 401k plan is the bedrock of their retirement nest egg, and for many the mutual funds in the 401k plan are the only stock market investments they own. (Data from the Fed shows that only 15% of Americans own stocks outside of a mutual fund or retirement plan, whereas more than 35% of Americans have a 401k plan or equivalent.)
The lifestyle you enjoy in retirement will depend largely on the returns you generate in your 401k plan, which in turn depends on your ability to manage risk and avoid major drawdowns. Today, we’re going to do exactly that — we’re going to look for ways to boost returns while also lowering portfolio risk.