Same Shirt, Different Color: Traditional 401(k) “Diversification”

As we perused our news feeds this morning, a headline jumped out at us: How to Get Better Returns From Your 401(k). It even made a few good points, highlighting:

Unless you do something called rebalancing, which is a series of transactions that result in resetting your account allocation back to what you originally selected, stocks could become a greater portion of your account over time. In most cases, individuals should rebalance their 401(k) plan account at least once per year with the objective being to maintain their risk level and gradually reduce their allocation to stocks and lower their risk as they near retirement.

But here’s the problem. When the article started getting into diversification, we found the options… well, not so diverse:

But just allocating your account to a few of the stock funds that recently had the best performance is not proper diversification and doing so can lead to disastrous results. If you loaded up on foreign and emerging market stock funds in 2010 and did not pay attention to your account, then you probably experienced big declines or under performance over the past 12 months in these funds. The lesson here is that you should not only diversify between stocks and bond funds, but also diversify within the asset category, holding large, mid, small and foreign stock funds.

Whoa, whoa, whoa – so diversifying means buying MORE stock? Even though, historically (particularly during crises), correlation among “diversified” stocks can go sky high? To hear this idea touted again and again leaves us shaking our head, especially because true diversifiers – like noncorrelated managed futures programs – CAN be part of a 401(k). As we wrote in 2007:

Many investors’ largest pool of investment assets is locked up in retirement and trust vehicles that can’t be touched for many years to come, and unfortunately too many are very tied to the stock market, holding mutual funds, individual stocks, and some bonds. It only seems logical to diversify some of those long term assets into non-stock market vehicles that can do well even if the stock market goes DOWN.

That is the real appeal of being able to invest these traditionally stock based accounts into managed futures. The ability to protect your money – or better yet, make money – if the stock market goes down over the next 10+ years.

To trade CTAs or trading systems in your 401(k) or IRA account, your retirement funds must first be held at an authorized futures-based custodian or trust company which allows futures trading. If you do not already have an account with one of the authorized futures-based custodian companies we can help you to establish one via a transfer or roll-over of funds. The trust company holds your funds, then distributes them on your behalf into your own customer segregated account within one of our clearing firms. Fees at the trust companies vary, but are generally in the range of about $200 per year for a custodial fee.

There any not any tax penalties for moving 401(k) or IRA funds into a futures trading account, due to the fact that the funds are still held by a custodian and only withdrawable at retirement. As far as the government is concerned, the investment activity in your account is treated exactly the same as if you were investing in mutual funds or even holding on to cash. IRA funds should always be sent to a registered Trust or Custodian BEFORE trading begins, however, to ensure investors don’t incur any withdrawal penalties.

Now, past performance is not necessarily indicative of future results, but we’re always surprised by how few people – even those who like the space – realize that a managed futures allocation is possible within a 401(k). Before you jump into a “diversification” plan for your 401(k) that more closely resembles buying the same shirt in different colors than building a full wardrobe, make sure you know exactly how diverse your selections actually are.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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