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.