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My New Investment Strategy (Not the S&P 500 Index!)

I’ve been contemplating this for a while…a 401k allocation change (ie. changing my 401k investment strategy). I kicked tail in 2020 and I’ve been doing great so far in 2021, but the economic and political atmosphere is beginning to change. And, while I am no investment professional, based on the economic and political climate, it’s about time for a 401k allocation change in 2021.

My Stock Market Crash Prediction in 2019

Stocks were soaring in 2019. The general stock market had gains of 33%…in just that single year! It was incredible!

Because of the rapid growth, everyone felt like it was only a matter of time before the market had a correction, and that time was likely 2020. I fully agreed with the analysts and warned my readers as well. I had the sense that the market was going to fall…and fall hard.

In late 2019, I begged everyone to:

  • Make as much money as they could while the getting was good
  • Cut out all the crap (ie. cut all the excess spending that didn’t really matter in their lives)
  • Pay off the debts
  • And invest in what they know (rentals, index funds, business, etc.)

I knew that at some point, the crazy economic growth was going to end and if we weren’t ready financially, we’d all be left hurting.

Of course, I had no clue that a pandemic was on the way. But just like I thought, the economic growth was halted and there were quite a few people that were suddenly in a world of hurt.

The 2020 Recession Hit – My Investment Recommendation

In March of 2020, the stock market took a tremendous dive. In just one month, the S&P 500 dropped over 34%! This, of course, was due to the fears brought on by the coronavirus and the detrimental impact it would likely have on the economy. 

Those crazy events inspired me to post an article titled, “Where to Put Your Money in a Recession. Here’s What We’re Doing“.

Basically, I told people that if they had money to spare, to put it into the stock market. After all, at that time nearly all the stocks were on sale!!

That’s what my wife and I did.

  • I continued to put money into my 401k (just like I always do)
  • I shifted my 401k allocation to mostly small-cap funds and S&P 500 indexes
  • And then, we poured in as much money into the market as we possibly could while it was still down

In 2021 I think we should reset our asset allocations. Why Change the Asset Allocation?

Before the recession hit, I was playing it pretty safe with my investments for my age. I was probably 80% in stocks and 20% in bonds.

If you’d look up “asset allocation by age” online, you’d find that most investment professionals would advise that I invest 90% of my money in stocks and just 10% in bonds. This is because I’m still pretty young at 35 years old. At this point in my life, I could afford to take a hit in the market because there’s plenty of time for it to bounce back. 

Buuutt…..given the crazy market rises in 2019, it was almost a certainty that the stock market was going to dip….which is why my 401k allocation was pretty light in stocks.

Then, like I said earlier, the stock market took an extreme dive in 2020. Stocks were on sale and it was time to reallocate my investments. 

In early April of 2020, I shifted my investment allocation from 80%/20% stocks vs bonds to 94%/6%! At that point, I wanted to be HEAVY in the stock market, and light in bonds.

Why do this?

The concept is actually fairly simple. The stock market as a whole has dipped many times. And, every time for the past few centuries, it has come back to its original levels and then some! Over long periods of time, the stock market just keeps going up. 

So, instead of putting just 80% of my investments into stocks, I went nearly all-in and bought up as much as I could! That way, when the market came back with a vengeance, the value of my retirement fund would rapidly increase along with it!

Was it the right move? Let’s find out.

Results of my 401k Allocation Change in 2020

After the stock market took that dive in late March, our retirement investments were worth $140,000. In about a years’ time, I figured we could pump $70,000 into the market and in turn, earn about $65,000 once it came back to its regular values. This would give us an ending value of about $335,000.

Well, as it turns out, I was wrong…

We actually did even better than we thought! 

At this point, the stock market has roared past it’s previous highs and is continually setting new records each and every week! And, to my surprise, our new 401k allocation has allowed us to beat the S&P 500 by a substantial amount (see the image of my personal investments charted below)! Since the drip in 2020, our investments have earned 52% while the S&P 500 has grown by just 43%.

401k allocation in 2020

(Want to chart out your progress vs. the general stock market like I did above? Sign up with our affiliate partner, Personal Capital. It’s free to use and is a fantastic tool!)

Our $140,000 retirement account is now worth $343,000! All thanks to the 401k allocation update that we made a year ago and from the additional money we were able to pump into the market.

The Current Economic and Political Shift

Having an extra $200,000 in our retirement account feels great, but if you know anything about history, you just can’t rest on your laurels and assume everything else in life will take care of itself. You’ve got to continue to change and adapt, just as the world does. After all, the only thing that’s constant in this world is change!

At this point, my 401k allocation is still 94% stocks and 6% bonds, and most of my investments are in U.S. companies. I have absolutely nothing in International stocks… Not very well diversified at all! If the U.S. market started dragging, my entire investments would drag right there along with it.

The Upcoming Economic Shift

In early 2021, the coronavirus vaccine became available in the United States. So far, it appears quite effective as new infection numbers have been cut in half. 

  • Restaurants are re-opening
  • More people are beginning to travel
  • And, businesses and investors are spending money again (instead of hoarding cash due to an uncertain future)

You may think this is great and that this will only cause the stock market to continue to rise, but I have one major concern…the tech companies.

The Potential Problems with Tech Companies

When the coronavirus hit and everyone was in lock-down, technology was important. People needed computers, they needed Zoom calls, and they got re-addicted to Facebook. The tech company values SOARED.

Now, with things going back to normal, I wonder if that growth will begin to stall, or perhaps even go backwards (especially when it comes to Zoom calls).

And…let’s remind ourselves of the largest holdings in the S&P 500:

  • Apple
  • Microsoft
  • Amazon
  • Facebook
  • Alphabet (Google’s parent company)

Hmmmm…lots of tech companies. It may be time to change my 401k allocation soon…like today!

The Political Shift

In 2020, the political tension was high. President Trump certainly didn’t mind making waves, and then there was the top democratic candidate Joe Biden who was promoting heavy government intervention to help with the pandemic and the economy as a whole.

  • The two sides were quite divided.
  • Riots became normal.
  • The stock market fluctuated wildly depending on who was projected to win the 2021-2024 presidency. 

Today, Joe Biden is president and the craziness of both parties is settling. In the next few months and years, there will likely be no more wild dives or gains in the market. I expect a gain in 2021, but much slower than that of 2020. Put another way, with the U.S. market at its all time highs, there is much less opportunity than what we saw just a year ago.

It may be time to shift our asset allocation away from the U.S. markets and toward something with greater opportunity.

My 401k Allocation Change in 2021

Remember how I mentioned that my 401k allocation was 96% in U.S. stocks and 4% in bonds? Check out the proof below (the 26% that’s unclassified is in an S&P 500 index fund…which is all U.S. stocks obviously.

(Like this view? You can get it too if you sign up with Personal Capital – my affiliate partner and my favorite tool to analyze my personal investments! It’s free!)

401k allocation of stocks bonds and cash

Given the fact that I earned 52% on my investment in a single year, I’d say it’s time to reset my asset allocation to something different.

So what is that something different?

No, it’s not crypto or currencies (I’m just not up for that kind of risk!).

I’m going to update my asset allocation to include quite a bit more International investments.

Why invest in the International market?

Many International stocks are down yet since the coronavirus variant is still running rampant. It’s unfortunate for the health of all those folks and their economy, but it also means an opportunity for a 401k investor such as myself.

Analysts have likely already reduced the outlook in various countries (like India currently, where Covid is taking hold again), which means the market is almost certainly down in those regions as well. Ultimately, this means that there’s likely nowhere to go but up in those markets (much like the U.S. experienced in March 2020).

And as an investor, the goal is to buy low, sell high, right?? That’s why I’d like to make the asset allocation to International, and soon.

Vanguard 401k Allocation Change

Alright. So I’ve decided to change my 401k allocation to include more International stocks, but how do I actually do it? How do I choose a new asset allocation?

My employer’s 401k is invested through Vanguard (which I LOVE!). The interface isn’t always the most intuitive, but the investment funds are solid and the fees are super low. So, if you can fight your way through a bit of the clunky user interface, you’re going to love the results that Vanguard displays proudly.

Below is a look at my current 401k allocation by fund type:

current asset allocation - due for a 401k allocation change

As we’ve already established, the majority of my investments are in the U.S. stock market. The best option for me to invest in the International market is through the first fund shown there (ha, you know, the one that I’m currently invested just 1% in. Lol!).

Why do I like the EuroPacific Growth Fund?

  • It’s a growth fund, which is riskier, but has more potential to increase in value
  • The fund has a great mix of many International stocks, so it’s not too risky, but I’m also getting a ton of benefit by being fully invested in the EuroPacific regions.
  • And, the expense ratio (ie. the mutual fund fees) is just 0.46%, which is pretty low for an International mutual fund

How to choose asset allocation

Again, I’m no investment professional, but here’s what I do when I’m reviewing a mutual fund within my 401k offering.

First, take a look at the expense ratio. 

This is usually in the overview of the fund.

Most foreign mutual funds are around 1%. And, if you recall my post on expense ratios, a 1% expense ratio vs. one that’s much smaller is a BIG deal (like a “millions of dollar impact” kind of big deal). This fund was just 0.46%. Not as low as I’d like, but still much better than average.

Vanguard American Funds EuroPacific

Second, review the historic returns.

On average, the S&P 500 has produced a 10% annual return.

In the last couple decades, the International funds have lagged behind that pace quite a bit. So, I’m pleased to see the lifetime earnings of 10.43% on this fund.

American Funds EuroPacific - Price and Performance

Third, review what’s actually in the mutual fund

Right now, Asia is getting hammered by the coronavirus again. Stock values have no doubt been reduced under the assumption that business and the overall economic growth will suffer in the short term. In other words, the stock price is currently down, which means it’s a great time to buy. 

Based on the regional allocation shown below, I’m happy to see that the fund is heavily invested in Asia and Japan. While they might be struggling now, I expect them to emerge triumphantly in the long-term.

American Funds EuroPacific Portfolio Detail

Honestly, this fund looks like a great one. The only question now is how much of my 401k to allocate to this fund vs. the others!

My Proposed 401k Allocation in 2021

Many people have asked me the question, “Can you change your 401k allocation?” Like, is it actually possible?

Of course!

It’s your money! You can invest it in anything you want!

And, quite honestly, it’s in your best interest to re-balance and reset your 401k allocation once in a while. After all, if something keeps going up and up and up for a few years, chances are that it’s going to come down at some point. Before it goes down, take that money and move it to the under-performer that’s likely to start doing well again.

More International, Less U.S.

Let’s take a look at my current 401k allocation again. It’s time to decide what mix to reduce so I can invest more into the EuroPacific Growth Fund.

current asset allocation - due for a 401k allocation change

First off, I’m frankly embarrassed to have the Vanguard Target Retirement Fund.

Already, at the age of 35, it’s starting to shift me into a higher concentration of bonds…which are honestly just a terrible investment right now. I need to get out of this target date retirement fund, and out completely.

That frees up 15% of my asset allocation for the International fund.

Next up is the Wellington Fund. 

I think this was still part of my original “play it safe” strategy in 2019 – the mix shift is 65% stocks and 35% bonds… Again, far to heavy in bonds for my age. I’m ready to get rid of this one completely as well.

Third, a look at Northern Trust S&P 500 Index Fund.

This index fund models the S&P 500 exactly, and I’d like to limit my exposure here. The only problem is, I don’t have that many other great options in my 401k plan. I’ll keep it, but bring the allocation down to 25%.

The entire amount that was freed up will go to the EuroPacific Growth Fund!

Add them up! 

  • 14.86%
  • 13.36%
  • and 1.33% (taking the Northern Trust account from 26.33% down to 25%)

I’ll be putting 29.55% into the EuroPacific Growth Fund! Time will tell if this is the right move or not! Hopefully I’ll report back in a year with a glowing review of this reallocation.

How to Change Your Allocation in Vanguard

Even though the site isn’t overly user-friendly, changing the asset allocation in Vanguard is quite simple.

Here’s how to change your 401k allocation in Vanguard:

  • After you log in to your account, on the bottom ribbon, click “Manage my money”
  • Then click, “Change my investments”
  • Select the icon, “Change current investment mix”
  • Assign your desired percentages in the boxes to the right of the investments, click continue
  • Finally, click “Submit”

How to Change Your Paycheck Investment Mix in Vanguard

The prior step re-assigned the allocation of your current investments. If you’re changing your investment strategy like I am, you’re likely going to want to change your paycheck investment mix as well. 

To change your paycheck investment mix in Vanguard, you’ll need to:

  • After you log in to your account, on the bottom ribbon, click “Manage my money”
  • Then click, “Change my investments”
  • Select the icon, “Change paycheck investment mix”
  • Enter your desired percentages in the boxes to the right of the investments
  • If you don’t see all the investments you want, near the top, select “Add funds” and select from the list, scroll down, and click “Add fund(s)”
  • Once you have all the funds on the screen with your desired percentages, click “Continue”
  • Then, select “Submit”

I Did It! A Successful 401k Allocation Change

I’m excited! I truly believe that the International stock market is undervalued right now and the U.S. stock market will likely slow down in the next few months. I hope that this move will allow my investments to continue to soar into 2022!

Never Stop Re-Assessing Your Asset Allocations

Perhaps you rarely look at your 401k. Shame on you. 

If you want to succeed with your investments, you should look at your 401k allocations at least once a year. Perhaps more in the highly volatile years.

Why?

Because the overall market might be earning 10% a year while you’re only earning 5%. That’s not good! If your investments are continually under-performing, you must quickly assess the situation and, if necessary, make a change!

I made this change based on what I see happening around me, and that’s okay too! If all the data leads you toward doing something different, then it’s probably time to do something different.

What About You? Are You Ready to Make a Change to Your 401k Investments?

What’s your take? 

Do you think I’m a fool? Are you doing something entirely different? 

Let me know your thoughts and what YOU’RE doing with your 401k allocation! I’m always willing to hear a different perspective!

Grow Rich Investing Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

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