Do you feel confident in your ability to invest wisely within your 401(k) plan? When you choose particular funds to go into your portfolio, do you feel good about the decision-making process that you used to make those choices? Do you keep in touch with the markets enough to be able to recognize different economic cycles and how they affect stock prices? If you answered “No” to any or all of these questions, take heart in the fact that you are definitely not alone.
Almost 49% of 401(k) plans provided by U.S. companies offer no investment guidance to their participants. Of the 51% that do, only 24% of those employees understand and implement the guidelines provided. More and more companies are offering 401(k) plans instead of defined benefit pension plans for their employees’ retirement accounts. Cash-strapped states and municipalities are beginning to change over to 401(k) plans as well. This means that every day more and more people are being put into this investment vehicle, handed the keys and told to have a nice day!
For people with some investing background and some free time for research, this should be a welcome development. Though much maligned, a 401(k) plan can be a great investment vehicle when driven properly. For many working people with families, however, finding time for this “driver’s ed” can be tough. Reading four or five fund prospectuses can be a challenge in between loads of laundry and cleaning up supper dishes. Keeping up with a company’s latest quarterly and 10k reports has to take a back seat when there are school projects to finish and leaky faucets to fix. Spare time is non-existent to most working people.
There is a way to help the whole process go a little smoother. Whether you are just opening a new 401(k) account or rebalancing an existing one, incorporating the use of charts into your investment research will help save time and boost your confidence level. Market technicians believe that one glance at a stock’s price chart can provide more information about that company than hours of reading its reports and prospectuses. They believe that a picture is truly worth a thousand words.
What is a price chart? Though they come in various configurations, price charts are basically graphs of the past prices of a security or market. They are backward-looking roadmaps that investors use to gauge possible future price movements. Is IBM in an up-trend? Look at its chart. Is the Dow in a bear market cycle? Look at its chart. You will know from looking at prices printed on the charts from the last few days, weeks or months. While past price movements do not predict future movements, being able to determine where a stock or fund is in relation to the current market cycle can provide some insight as to where prices are likely to move next.
Charts provide this insight by showing reference points you can use in your decision-making process. Is your fund or stock at an all-time high in price? Is your fund trending lower? Are the overall markets moving sideways? Once you learn to read charts and identify the reference points, you can answer these types of questions easily and quickly. Using charts as one of your market research tools will make you a more confident investor. You will not have to rely on hope, luck or some guy on television shouting out his market opinion.
Although there are many different methods for using price charts in your research, there are three very important uses that can have an immediate impact on your portfolio:
Recognizing overall market direction can directly affect your investment decisions. Investing during bull or bear cycles require different approaches (unless your account can stand another “lost decade”). Charts will show you where the market is trading in a cycle. The performance of an individual investment is crystal clear when viewed on a chart. You do not have to rely on analysts’ opinions, company CEOs’ comments or questionable financial statements to know if a particular investment choice is the right one. Comparing investment choices within your plan’s list of stocks or funds can be done simply and quickly. Do you need a mid-cap fund in your portfolio and have three to choose from? Put the charts up side-by-side and compare their performance to each other. Pull up a chart of the S&P 500 and see which of the three performed better compared to the overall market. Some charting services even give you the ability to layer one chart atop another to make the comparisons really easy.
Perhaps the real beauty of using charts in your research is this: if you make an investment mistake, you will know it pretty quickly. Charts, like all other investment tools, are not 100% accurate in forecasting market direction. So if you make a wrong choice and one of your investments turns south when your others are moving higher, it will be clear to see on the charts. You will be able to take action instead of being caught off guard.
Basic chart reading skills, which are really all long-term investors need to know, can be learned and put to use in a reasonably short amount of time. There are many places you can find information on charts and how to use them:
your 401(k) plan provider: a few of the providers who do offer investment guidance to their participants include some basic charting education your brokerage: if you do some investing outside your 401(k) account, the brokerage you use should have excellent charting tools and charting guides on their website print and ebooks: you will be amazed at the number of books you can find related to this subject, many written just for beginners charting services: just Google “stock charts” and you will find dozens of great websites that offer free charts and instruction to investors at any knowledge level
Once you understand and begin to use charts in your investment research, you will wonder how you ever got by without them. So grab the wheel and take off, but keep a roadmap in your glove box. You might make a wrong turn on occasion, but you will never get lost again.