Slow Rotation in my 401K

I analyze my 401K funds once per month - during the first week of the month.  I use a momentum type system that analyzes all the funds in my 401K choices and tells me which 3-4 funds I should place my money in. I developed this system a long time back after spending 3 months on weekends analyzing the various methods. I credit my friend Wen for revealing his method to me as my method is basically an offshoot of his – a little simplified version so that I could back test it manually.

Let me point out that I am seeing a slow rotation taking place and a change in momentum is occurring. When I analyzed the 6 month performance of all the funds, not much has changed. But when I look at the 1 and 3 month performances, I see that a rotation has taken place. Funds like Fidelity Growth and Vanguard Explorer Admiral have been replaced at the top by the PIMCO Global bond fund and the Fidelity Govt Income fund.  What does this mean in an actionable item to me?

I am shifting some of my money into the Bond funds and reducing exposure to the stock funds. I am still about 70:30 stock to bond funds; but I also have my stock funds all hedged using SPY put options in a separate R/IRA account. So for now that is the change I am making and will take another look next month. No action in between. It is a slow system that is designed to minimize in and out movements between funds.

The back test results have been extremely good with very little drawdown. I had done the original back testing in the 2002-2003 time frame. Any system that minimizes your losses in 2002 and is able to shift you back into stock funds by late Spring in 2003 is a good system in my books. 2002 was a real bad year for equities and 2003 was a check mark type year; started bad but reversed and took off like a rocket. Similarly, in a really down year like 2008 where markets dropped 30-40% this system only lost about 5%. I was overall flat for the year. And in a year like 2009 it came back and placed me into the leading stock funds that generated about 23% reward. That too because I had taken half the profits early in the August – September time frame as 2008 was a shaky year and I chose to book my profits early in my 401K. I think everyone needs to formulate their own logic and rules for managing money in their 401Ks and R/IRAs. That is after all the largest part of our nest egg, given that home equity has taken a massive beating in the past 4 years. Wish I had hedged my home equity – but that falls in the coulda shoulda and woulda category….