Over the last few weeks, the three main U.S. stock indexes — the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite index have all climbed to record levels.
That is great news if you own the mutual funds on your company 401(k) retirement plan menu that are heavily correlated to those popular stock market indexes.
However, there is an equally important U.S. stock market indexes that worries investment professionals now. One index has shown the early warning signs that the current stock market advance lacks the necessary depth to continue.
The Russell 2000 Index of small-cap stocks has lagged the investment performance of all the major U.S. stock market indices over the last few months. That fact is indicated in a relative strength measurement of these indices.
Relative strength is a key component of technical analysts. This tool measures the investment performance of one asset class or individual mutual fund versus another. It can also rank the investment performance of a group of asset classes or mutual funds versus every other member of the group.
Last week, the S&P 500 rose to record high levels. The last record high level of the Russell 2000 Index was in August of 2018. Good news if you own large and mid-cap mutual funds in your company 401(k) account. Bad news if you own small-cap mutual funds.
Individual company 401(k) retirement plan participants who own any amount of small cap mutual funds have taken all the risks associated with stock market investing over the last several months. The investment management problem for them is the fact that they have not been rewarded with record investment performance.
All the stock market risk with less than stock market index investment returns is not the path to your desired retirement date. If you take stock market risk, you have to get rewarded; especially when the U.S. stock market averages move to record highs.
Relative strength rankings of the default mutual funds on your company 401(k) retirement plan menu is the core of the investment management service I provide to my individual company 401(k) retirement plan investment advice clients.
Relative strength solves the age-old problem of individual company 401(k) retirement plan participants guessing at “what to buy.” My clients only own the best mutual funds available to them on their default company 401(k) menus.
What is your favorite sport? College football, NASCAR, PGA golf, FIFA soccer and Professional Tennis all have rankings. And those rankings change as the season moves along and games, races, matchings, and tournaments are won and lost.
The higher ranked teams have the most successful seasons. It is no different when you have to chose your company 401(k) retirement plan mutual funds.
There are very expensive investment management lessons to be learned in how best to manage your company 401(k) retirement plan mutual fund menu. Those lessons most often begin with a relative strength ranking of the mutual funds.
Ric Lager
Lager & Company, Inc.
