If you hear of a strategy that beats the market every single month or every single year, then you can be sure the results are made up by the seller of said strategy. Something that supposedly “works” 100% of the time, simply does not really exist. What’s a better alternative?

401k participants are generally advised to take one of two approaches when they invest in their plan; that is, it is age-based or fixed. We advocate a third approach that focuses on the markets. Let me explain.

The first approach that has recently been gaining tremendously in popularity is the agebased 401k investment method. This approach also comes under the names of target funds or lifestyle funds. The funds invest set percentages in different assets of stocks, bonds, and cash that depends on the “target date” of retirement. The allocation into each asset changes as the target date nears over the years. Participants choose one fund based on their age and hold it until retirement. The question is what does your age or anyone else’s age have to do with the market’s returns and risks? The answer is absolutely nothing.

The second approach is similar to the first, but is a fixed percentage allocation regardless of one’s age. Typically, this is a 60% stock and 40% bond allocation.
This approach sources from the very beginnings of portfolio management known as Modern Portfolio Theory (MPT) in the 1950’s. That 60/40 percentage was based on the market capitalization of the stock and bond markets at the time. The issue here is the world has long since changed. It is far outdated.

The third approach is the one we advocate. It focuses on the best fund managers currently in today’s markets, while recognizing the leaders change over time. We measure this by C (Comet). C is the risk adjusted relative strength number. The higher the better. Each month we rank the retirement plan funds by C. We then use a rotational allocation strategy designed to invest with the funds providing the most return and least risk. This is a powerful strategy to keep your contributions working for you as hard as possible in today’s markets.

In any one month or year, this C strategy may or may not outperform the markets, but over the years, it is has been shown to be an outstanding strategy designed to stay on the cusp of the fund choices providing the most return and least risk. Stay with the winners and avoid the laggards in your plan.