Question: Why isn't the average 401k investor NOT allowed to do trailing stops on their accounts?

[uponit7771]

A trailing stop would PROTECT 401k's by doing a sell order on an account at any time it went down a certain percentage (for me that's 10%) and it would protect peoples 401k accounts from going to far under when they don't have to.

I've been looking for an investment forum to ask this on but you get almost the same response as I got from my financial adviser; just dollar cost average in on the down and "wait" for the up?....mostly because they don't have the ability to do trailing stops with mutual funds.


That makes no sense, there are few things in life a person should just watch go from bad to worse and do nothing and the same should be for your retirement accounts.


Thank you in advance for your input

[slipslidingaway]

1. They were meant to be long term investment vehicles not

trading vehicles, I think that is one reason, there could be others as well.

[uponit7771]

3. "long term" doesn't mean watch it go to 10% of it's original value then "hope" it;ll go up after DCA

...back in, I don't see the two concepts competing thought and it would send a message to wall street that their mut funds shouldn't have the volatility that they're showing now OR they should be moving out of bad equities instead of watching them go down to penny stocks/.

[slipslidingaway]

5. Not saying that is the way it should be, just stating what may

have been a reason.

[w4rma]

2. Two reasons, from my perspective.

1) To prevent automatic runs on stocks.
2) 401K money in the stock market is accessible to the stock market sharks and they want to be able to eat up as much of it as they can.

[uponit7771]

4. Yeap, sounds bout right...Talked to two other advisers and they mention the same thing and acted as

...if I was talking about killing Bambi or something.

[MercutioATC]

6. All 401k's should offer non-equity options.

We don't need to turn 401k investors, but they should have a safe place to park their money.

[bbinacan]

8. Most if not all 401(k)s

offer non-equity investments.

[MercutioATC]

9. I know most do, but it should be a requirement.

...and as long as people have that option, their money is their responsibility.

[bbinacan]

11. If I'm not mistaken

a money market option is required.

[MercutioATC]

13. So what are all of these people complaining about?

I thought they were stuck in equities. They had the option of keeping their money safe and just chose not to do so?

[NeedleCast]

19. In a lot of cases, yes

Too many people don't pay attention to where their money is in their 401k, or what it's doing.

[uponit7771]

20. That's why the average investor should be able to do trailing stop, it would protect them from

...lazy ass'd FA's etc who teach people to "dollar cost average" as an answer to down markets vs. protecting their gains.

Every 401K account should at the least have alerts to email or call an investor when volatility enters their funds.

[NeedleCast]

26. The flip side of that is that people need to pay some level of attention

What I'd like to see as an alternative is some retirment plan training offered (or being required) by employers who offer them. Maybe a once a year full day class on investing basics. I think it would go a long way torwards giving people an idea of what their 401k means, does and where their money should be going at (x) age. DU has had an unfortunate number of examples of people who were near retirement age and still had their money stacked up in equities.

The curse of the market is that if you're not a big player, you're not going to get much, if any, attention from a broker. Investment holders just don't have manpower to call people every time a stop hits. Joe middle-class needs to be given some level of education on what his/her retirement fund is doing and be given some knowledge on how they want their money moved around.

I like the E-mail alert idea, I'd just worry that that would cause runs as well. For a person like me, at age 35, I'm not terribly concerned about the fact that my 403b has dumped half it's value. Still, panic selling is bad, and I worry that a stack of people getting an E-mail alert would cause exactly that.

[uponit7771]

28. In regards to your last comment

Again, thx for a civil discussion on this matter

"...I like the E-mail alert idea, I'd just worry that that would cause runs as well. For a person like me, at age 35, I'm not terribly concerned about the fact that my 403b has dumped half it's value. Still, panic selling is bad, and I worry that a stack of people getting an E-mail alert would cause exactly that..."

The reason why these "runs" would work at first, IMHO, is because fund managers would be forced to pay closer attention to their funds also; IE making them do their damn jobs and not protect their homeys by holding on to equities that aren't worth much.

Also, if they fund managers knew people would dump them at 10% I bet dog on well they'd look closer into their top 10 and demand more independent ratings for bonds (S&P, Fitch and Moodys should be in jail right now)

There shouldn't be that kind of "beta" (or volatility) in these funds, these funds should have a level of steady growth and if they go down 5% then there's something wrong.

[NeedleCast]

29. Anything that keeps the managers invested in their work is probably a good thing

and I agree with what you're saying there. Maybe there's a way to temper an alert by making (say) an E-mail alert. Knowing the way these managers work, the E-mail alert would look something like:

Oh, hi there, your (xxxx) fund is down 10%. Please call 1-800-xxx-xxxx and choose from the following menu:

Press #1 for OMG! Crap pants and sell sell sell!
Press #2 for Meh, I don't care.

If the alert could take the form of something with educational options, I'd be 100% for it so instead of the above, you'd get

Oh, hi there, your (blue chip slow growth equities fund) is down 10%. Because you are 28 years old, this may not be a bad thing for you (or) Because you are 59 years old, you should consider a move to (safer waters).

Ultimatly going to be a matter of what the fund managers are willing to invest, manpower/hour wise.

[uponit7771]

30. lol...#1 hopefully would happen less

[uponit7771]

22. The average investor is tought to dollar cost average NOT to protect their gains. DCA isn't...

..the only answer to protect assets in volatile\down markets

[MercutioATC]

31. I'm aware of that, but isn't that THEIR responsibility?

It's their money. Why are they listening to talking heads and not actively managing their money?

[slipslidingaway]

7. Back in late 1999 or early 2000 there was an article which had the

figures of money going into the market from 401K's and money coming out of the market from defined benefit plans, those in the know were selling to people putting money into overvalued equities, it was quite eye opening.

[uponit7771]

18. Trailing stops aren't allowed, there shouldn't be 10% volitility in 100$ mut fund stocks.

[GoesTo11]

10. 401k's are a trap.

With tax incentives and matches as the honey, you put your paw in and you can't get out. Then while you're there, you get skinned alive.

[MercutioATC]

12. How is it a "trap"?

Before-tax contributions, sometimes matching fnds...it's a gold mine.

[GoesTo11]

16. Trap because you think there's no alternative but to put your money there and keep it

It encouraged a lot more money to flow into the stock markets than maybe should have. That drove up prices. Then the people who were flexible took their money out and the suckers (like me) who thought you should just keep it in for the long term rode it out and are stuck with the loss. I think the policy is intentional to have 401k laws to incentivize people to put their money in there to avoid taxes otherwise. I would rather just be able to have the tax break whether I put the money in or not, and not have a penalty for taking it out. True, no one forced me to keep my 401k funds in stocks instead of switching it to CDs, but if you have to be in CDs, then I'd just as soon have spent the money on my life now. Company matches - bullshit. They could either pay a higher salary anyway, or they could give pensions like in the old days - they yanked them away and gave a puny contribution to 401ks instead to get out of it.

I'm happy for retirees who happened to do well with it, but the point is that if you were born at the right time, it's fine otherwise you're screwed. That's not how pensions work. Don't believe me? Try this. Go to Yahoo finance, and download the monthly Dow Jones prices. Then imagine you dollar cost averaged in $1000 per month starting in October 1991 and continuing until today, almost 18 years later. You would end up with exactly the same amount of money as if you dollar cost averaged into a mattress. And that's not counting fees. And there's been about 50% inflation since then. If you're smarter than dollar cost averaging into an index - a better market timer and a better stock picker, glory to you, but realistically, very few people are that good even if they congratulate themselves afterward.

As for the before tax contributions - who cares? If I could retire and take it out now, I'd still pay taxes on it. The only benefit is that you get the earnings on the pre-tax contribution instead of the earnings on the post tax contribution. My earnings are negative either way, so it doesn't matter. In fact, I would have been better off paying taxes as I earned the money and then losing it in a stock fund where I could then at least deduct the losses against current income.

It was sold as a gold mine. But I have concluded that there was a large scale effort to just get a generation or two to dump their $ into the market for the sake of pumping up prices. Not a conspiracy theory either. All these laws were passed with heavy lobbying from the securities industry.

Now, assuming a 10% return ....

[MercutioATC]

17. It's money. It has to be actively managed.

Investing money is a responsibility. If somebody just threw money into a 401k without understanding anything and lost money, that's their fault. The 401k is a great vehicle to save for retirement.

[GoesTo11]

32. If people on average are losing money, they can't be that good.

Some people win, more lose - that's not a great vehicle. It might be like poker, where if you are able to find a good game with a bunch of suckers, then it's their fault and a great vehicle for you. But overall, I'm just not seeing how it's a great vehicle.

My experience was that I left my money in mostly low-expense stock index funds, some bonds, some cash, about what was generally recommended for my age. I have a pretty high level of knowledge of the math side of finance. I knew about volatility and standard deviations and betas and so on. But like the average investor, I did not see the crash coming. I didn't realize that the corrupt thieves of Wall St. had riddled the system with trillions and trillions of dollars of bad debts. You may have, and that's great, but pretty clearly, the vast majority didn't. The total decline in market value represents the total amount of money lost so if you didn't lose it, someone else did.

If you got the average return dollar cost averaging since 1991 (0%), then these are not a great vehicle. If it depends on beating that average by 8% or whatever, then it's a horrible vehicle. I think my vehicle will be just paying off my mortgage.

[Incitatus]

15. My parents, who have retired with 7 figures, would disagree. nt

[Greyhound]

14. Because "it's your money" is just the hook to justify their theft. n/t

[NeedleCast]

21. Automatic Runs

I think that would be the number one thing.

I think the other problem would be what to do with the money if you hit a stop. Where does it go? Does that money shift to a money market fund in your 401k program? You'd get creamed if you wanted a cash out option becaused youd then have to pay taxes on whatever "sold" and came out.

[uponit7771]

23. Yeap, I thought the same thing

"Automatic runs..."

Meaning fund manager will be looking at their funds closer and will make sure they know where to put their money when things get bad and not hold onto equities that trade down too low.

"Does that money shift to a money market fund in your 401k program? ..."

Bond funds, they can absorb the cash

"You'd get creamed if you wanted a cash out option becaused youd then have to pay taxes on whatever "sold" and came out. .."

Wouldn't happen inside a 401k, you can trade between equities, funds etc if the service will allow it.

[NeedleCast]

24. Part of the 401k, 403b plan though

is that the holders can manage them with a minimum of time, for better or worse, unless they developed an automated process for moving money around every time a stop hit.

I honestly don't think its a terrible idea, I just see some issues with it that would have to be worked out. Like I said in another thread, there are WAY too many people who pay no attention to where there money is being invested in their 401k. Lets say Jon Doe sets up a bunch of stops and we have a recession hit like we do right now and pratically all his stops trigger and dump the vast majority of his investment in a bond fund or money market investment and he goes plodding along, not paying attention, and then realizes at 58 that his 401K is worth 50% of what he thought it would be worth.

I think that fear of runs and a lack of desire on the big retirment investment holders to have to actually manage the money vice stuffing it all in big equities groups and sitting on their hands is the hurdle to your plan.

[uponit7771]

25. Involvement should be encouraged

"...is that the holders can manage them with a minimum of time, for better or worse, unless they developed an automated process for moving money around every time a stop hit..."

This is what I understood also but after being hit with DOT com, asset liars (enron, xerox liars) and reThug deregulation the wife and I said we can be more involved than we were.

"...I honestly don't think its a terrible idea, I just see some issues with it that would have to be worked out. Like I said in another thread, there are WAY too many people who pay no attention to where there money is being invested in their 401k..."

It's a culture of advise here in America that people get, stick in it in the 401k and don't worry about it and we now know that's not wise.

"...Lets say Jon Doe sets up a bunch of stops and we have a recession hit like we do right now and pratically all his stops trigger and dump the vast majority of his investment in a bond fund or money market investment and he goes plodding along, not paying attention, and then realizes at 58 that his 401K is worth 50% of what he thought it would be worth..."

I'm not saying this should be for everyone but the option should be there along with a culture change of people to pay attention to their 401ks on a monthly basis vs quarterly or yearly. Also, IMHO, allowing trailing stops would take that kind of volatility out of Mut Funds mostly because fund managers know the 5% - 10% risk tolerance people would have. There would be no more fund managers sitting on the sidelines with their homey's watching peoples accounts go down 40% when they know people will dump them at 10. They'll have to REALLY manage the funds AND take even more volatility out of the S&P because their books will have to be handled better.

The less the average 401k investor puts up with wall street stupidity the more performance we get out of them.

"...I think that fear of runs and a lack of desire on the big retirment investment holders to have to actually manage the money vice stuffing it all in big equities groups and sitting on their hands is the hurdle to your plan..."

Actually the real hurdle is for companies (or servicers) to allow for this in 401k plans or at the LEAST allow for alerts, an alert will email when funds start to waver and allow for proper watches on them.

Many companies don't allow this in their service plan regardless of the fact they allow for free movement amongst funds

Thx for a civil conversation on this matter, I've talked to FA's and they act like your talking about eating dead puppies.

[NeedleCast]

27. Hehe, most FAs would sooner eat a live puppy than admit the market is down

I mean, if people were activly managing their funds, the FAs wouldn't be able to clock out at noon to head for the golf course...

I like the ideas of alerts as long as it didn't set off paniced selling. That's why I think (like I said in the other sub-thread) that employers who offer a retirment fund should be (I think) required to provide annual education/training of some sort to their employees. I'm lucky to work for a non-profit that is very employee oriented as they provide this sort of thing.