A few weeks ago, I discussed tactical moves you can make in your investment portfolio to allocate a portion of your investments to take advantage of the current environment. You can base tactical moves on economic conditions — for example, if you anticipate a pullback, you might allocate more to consumer staples and utilities. Tactical moves might also be based on policy or political environments, such as allocating a portion to energy companies with exposure to renewable energy.

However, I recently came across an individual who wanted to shift his entire 401(k) allocation into growth stocks.

It’s true; growth stocks have experienced phenomenal growth this past year. While everyone has been working at home during the pandemic, many investors have had a lot more time to monitor their stocks. This time has created a new wave of amateur day traders who think they have the secret to success — and now they want to do the same to their 401(k). But jumping into growth investments right now is akin to driving down the connector while looking only in the rearview mirror.

In my opinion, this is way too much risk for funds marked for your retirement. When I speak of tactical moves, I’m only referring to a portion of your portfolio. Even if you were an aggressive investor with a high risk tolerance, I would not recommend allocating more than 30% of your portfolio to tactical positions.

Employer-sponsored retirement plans very rarely have individual stocks for investment. Most commonly, the plan sponsor and adviser work to develop a selection of mutual funds and occasionally exchange-traded funds for investment. These selections are generally chosen for the stable long-term growth they provide. Furthermore, many plans have limits to how often you can make trades.

Ideally, you’ve allocated your 401(k) according to your risk tolerance and possibly even your target retirement date. I believe it is best to stick to your plan. Even when the market was falling in March this year, my recommendation was still, if you don’t need the money for 10 years, leave it where it is. Then, as is the case now, a rebalance of the account holdings to your original strategy allocation might be in order. Since 1926, there have only been two rolling 10-year periods that produced a negative return. On average, 10-year rolling periods yield about 10.5% for the broad market.

If you want to make a move that may have a long-term benefit, you may consider allocating some of your 401(k) to a Roth 401(k) if your plan has that option available. Roth 401(k)s work much like your standard 401(k) option, but your contributions are made after tax, and the investments grow tax-free until retirement when your withdrawals are also tax free.

For younger investors in lower tax brackets today, this can be significant savings for the future. Depending on your plan, you can save up to $19,500 to a Roth 401(k) in both 2020 and 2021. Employees 50 and older can take advantage of a Roth 401(k) as well, as the savings will diversify the tax liability of their retirement funds, and with the allowed catch-up contribution, they can save up to $26,000.

Overall, your employer-sponsored retirement plan is an important benefit provided to you and can be an important tool to secure your financial future; therefore, you shouldn’t treat it as your play account!

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William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.

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