2 Things that go down in October - Halloween & Your 401K Stocks

If history is any indication of future stock market directions in October then your 4th quarter 401K statement might just 'frighten' you more than all the little ghosts and goblins that come a creepin' n crawlin' and knockin' on your door with bags in hand to collect their sugar coated treats this year. As we all know the October tradition of Halloween will indeed be celebrated by all the young children and adults alike who wish to participate this year but the direction of the stock market this fall may not lead to such a joyous hats n' horns style celebration. History dictates the fall season may be somewhat shaky or even down right HORRIFYING for the major stock market indices such as the DJIA , NASDAQ & S&P.

Although October may not actually be the worst performing month on record for stocks, the psychology of market participants during this period seems to be at it's worst which usually means individuals and institutional investors are very cautious and may be reluctant to lay money on the table in exchange for stock certificates, hence the possibility exists, as it always does around this time of year, for a moderate to substantial correction or decline in the coming months. But then again, just when you think you got it all figured out, you usually don't, and of course the anticipated end result of all your dedicated extensive midnight oil burning research might not materialize, leaving you with a lantern full of ashes and another misdiagnosed prognostication, which may be the case once again this year.

So if we indeed experience stock market turbulence this fall what can we do to prepare and possibly cushion the impact? What can be done to ensure your bag of stock certificate treats & crunchy candy bits survive intact as we venture toward this ever so scary season? protecting your bag of Halloween treats is pretty simple, but your 401K? Maybe not. I think the first proactive step toward protecting your financial sweets would be a more complete understanding of what your 401K plan actually is and what 'tricks or treats' it contains. Some of you may already be well aware of the diverse and complex financial instruments within your company sponsored retirement plan, but if your not, or possibly a little confused about what a 401K plan actually is, hopefully this hub will help to shed some additional light on this DARK, GLOOMY, & MYSTERIOUS subject. Like anything else, understanding the basic concept is step one toward making wise decisions and protecting assets that you've worked so hard to acquire. The content of this article will certainly not make you an expert but hopefully after we're done, you'll be just a little more knowledgeable on the subject than you were prior to reading.

• But remember, I am not a professional. Always consult your Financial Advisor, Accountant or other persons you rely on for assistance before making any decisions or adjustments in your 401K or other holdings in your portfolio.

In this article I hope to accomplish the following two goals:

• Provide a basic understanding of what a 401K plan is.
• Define the various investment vehicles which are typically found in a 401K plan

WHAT IS A 401K PLAN?

A 401K is an employer sponsored 'savings' plan in which employees can voluntarily make periodic and systematic contributions that are automatically transferred from their weekly or bi-weekly paychecks. In some cases your employer may 'match' your contribution dollar for dollar or any other predetermined percentage. Usually before the matching contributions are yours a certain 'vesting' period must be achieved, 5 years of employment with the same company seems to be the average vesting time frame. Your employer does not manage the actual 401K plan, this is performed by a neutral third party. Some of the larger high profile firms or institutions that manage billions in 401K assets would be Fidelity or JP Morgan Chase etc. In exchange for a management fee, they perform the day to day operations and administrative duties to ensure the plan functions smoothly. So in essence, a very basic description of a 401K plan would be the following.

'A tax deferred vehicle that provides a diverse menu of mutual fund investment options where you as employee can make regular voluntary contributions until retirement. You give authorization to your employer to make automatic withdrawals of a certain pre determined percentage of 'before' or 'after' tax monies from each paycheck, the monies are then transferred into the 401K plan '

The basic 401K concept is pretty straight forward, the investment vehicles contained within the plan is where things may get a little complex.

WHAT INVESMENT VEHICLES ARE TYPICALLY FOUND IN A 401K PLAN?

One note of importance is the following fact. A 401K plan is not FDIC insured, which means there is a certain degree of risk depending on investment allocations which are made by the employee. All 401K plans usually offer the entire range of mutual funds, from very aggressive high risk options to very conservative low risk vehicles, and just about everything in between. Most participants are well aware of this fact however I think some people may be a little confused in regard to what their actually putting their money into. The following is a general description of typical investment vehicles or mutual funds that are included in the average 401K plan.

Stock funds

• Large Cap - On average, a market cap of 10 Billion or higher. Large Blue Chip Companies with a proven track record of consistent earnings ( Example - Microsoft, IBM, Proctor & Gamble ).
• Mid Cap - On average, a market cap of between 1 - 9 Billion. Medium sized companies which do not necessarily have a history of consistent earnings however have more growth potential verses Big Cap Stocks.
• Small Cap - On average, a market cap of 1 Billion or less. Usually a company in financial difficulty or a newly established company which may have most of it's growth ahead of it.
• Emerging Market - An industry or sector which is 'hot' so to speak and shows significant future growth potential.
• International - Self explanatory, any company headquartered outside the U.S.
• Stock & Bond - A mix of stocks & bonds.
• Index - A fund that invests mainly in stocks which are included in a certain index such as the S&P 500.
• Stable Fund - Invests in the most conservative financial instruments, although not a traditional savings account it's the safest and least volatile with minimal risk to principal ( Almost every 401K plan includes at least one of these funds ).

In the typical 401K plan you have several different investment options to choose from and you should seek consultation from your resident financial expert regarding asset allocations suitable to your unique situation and future financial goals. Ask that person if they think it would be a prudent financial move to transfer part or all 401K monies into a safer non volatile 'stable' fund prior to anticipated market dips, or if you should just weather the storm and continue to dollar cost at a lower price if indeed the market takes a serious tumble. One major consideration when making a decision of this nature is how close to retirement you are. If it's just around the corner, perhaps protecting your principal would be top priority and the prudent decision, but if time is on your side then maybe weathering a potential storm might be the way to go. If you have decades remaining before retirement a continuous dollar cost averaging program may work to your advantage in the long run, buying more shares when the market does go down will bring your overall cost basis down, but once again, check with your financial person for consultation and advise on which path or strategy you should take.

But please remember, there is usually at least one 'STABLE' fund within all 401K plans. This fund is one of your only 'buffers' between a substantial stock market decline and preserving your hard earned 401K money. The stable fund does not invest in 'stocks' but rather very conservative low risk money market and government backed securities such as bonds. So when the stock market goes down this type of fund loses very little if any value.

Check with your financial person for more information and strategies on how to 'Octoberproof' your 401K plan. Halloween is already 'scary' enough.