I recently was asked by a friend to evaluate their 401k investment plan.  This exercise just reinforced my view that 401k’s leave a lot to be desired and are blunt investment options.

Essentially, many of them require you to be invested in bonds or stocks or both, with no other choice.  This leaves out the two other main investment options you should have in your portfolio, which are cash and gold (or precious metals).

That’s a pretty serious drawback because it forces you to be fully invested at all times in all markets.

Only rookies are fully invested.  Serious, successful investors keep plenty of cash in their portfolios.  I’m talking serious investors like Warren Buffet, for example.

Why do they keep plenty of cash in their portfolios?  After all, cash is always losing money due to inflation, so it essentially carries a negative interest rate.  So why would they do this?

Because it gives them the opportunity to swoop in and buy stocks at big discounts whenever the stock market goes down.  That’s right — when everyone else is heading for the hills in total panic and selling off their stocks because the market is going down, these guys have plenty of cash on hand to go in and scoop those stocks up a fire sale prices.

They are litterally sitting back just waiting for this to happen.  Because the price you pay for a stock is a major factor in your succes as an investor.

What’s that old adage rattling around in the back of my head — oh, that would be “buy low, sell high.”  You’ve heard of that I’m sure.

And having plenty of cash on hand allows you to do that.

So why do companies 401k’s not allow you to do that.  Well, I’m not sure, exactly.  I have a couple of theories, but take them with a grain of salt.

My first one is that the 401k plan offerings are made by some ad hoc commitee in the corporation that doesn’t really know all that much about investing.  They just meet with a 401k company a few times and just go with their recommendations.  Oh, they probably ask a shallow question or two, but it’s really done with that old “get her done” corporate mentality.

And the 401k company is all to happy to offer plan choices that keep members fully invested in their stock and bond fund offerings.  After all, that’s how the can charge fees – by keeping you fully invested in their products.

And they would have trouble justifying a fee on holding you cash — interest free, now wouldn’t they?

So call me a conspiracy theorist if you like, but this sure seems to set up as a sweetheart deal for everyone but you, the investor.

What a surprise that is.

To your health and prosperity – John