How to use Trend Tracking for your 401k

Recently, I received some e-mails from several investors who have run into problems with their 401k plan providers with early redemption charges and frequent trading accusations when following my Trend Tracking methodology.

I have several clients, whose 401k/annuity accounts I personally manage, that are housed at Fidelity and Vanguard, two companies known for their restrictive policies. I have not run into problems with holding periods, but we had to pay one short-term redemption fee last year, which was well worth it due to the market severely retreating. My client had no problems with that, after all, capital preservation is on the top of our list.

Having discussed this with several clients, I have come to the conclusion that there is one common denominator which may contribute to this problem and which you can easily rectify.

When setting up your 401k, you are asked to make a decision as to how to allocate your future contributions. While you can change that at anytime, most investors never bother. For example, their set up determines a percentage to go into Fund A, B and C.

If you are on a bi-weekly pay period, you are purchasing small amounts in each of those 3 funds every 2 weeks. While that is the basis of dollar cost averaging, it will work against you if you all of a sudden decide to do some trend tracking and sell all of your positions because market behavior dictates that you do so.

The bottom line is that you have created a bunch of purchases, the last one of which may very well have been executed just prior to you liquidating all of your holdings. I believe that these buy and sell patterns are being tracked by software using sophisticated algorithms to determine if you are a frequent trader or not. If the software determines that you are, a letter is automatically being sent to you.

There may not be any human being involved in this process until your name gets kicked out.

I had this very same experience, even though not investment related, with this blog, which is hosted by Google. A week ago, I received a computer generated letter from them that their “automated classifiers” detected that my blog had characteristics that resembled spam. They disallowed any further postings (not comments) until a real human being had the opportunity to look at it to determine if in fact spam was involved or not.

This big moment arrived today, and I was cleared of all charges…

I believe that this type of evaluation is being applied to your trading habits in your 401k or annuity account as well.

Here’s the gist of this story: Have all your 401k contributions go into the money market option of your account. Once you have accumulated a sizable sum, such as $3,000 or more, make your investment into the fund(s) of your choice.

I believe that this will cut down on recorded trading activity and still will afford you the opportunity to get out of your positions when it is in you best interest to do so.