If you received the September 7^th copy of The Wall Street Journal, you would have encountered Jason Zweig’s article on the bottom of the first page titled: “Trading Your 401(k) Account: How Bright Can It Be?”

The article discusses the rise of services that encourage you to think short-term within the confines of your 401(k) account, offering advice that is designed to shift strategies every month. Here are the money quotes form Zweig’s article:

“Your 401(k) retirement plan is supposed to be the ultimate long-term holding, with a horizon that for many investors extends for decades. Even so, advisory services are springing up to help you manage your 401(k) over the short term, urging trades every few weeks…

“We think buy and rotate is better than buy and hold,” Mr. DiBerardino says. “We don’t think it’s prudent for T. Rowe Price to suspend people from trading their funds”…

An online service called ACTIVE401K charges $19.95 a month to provide e-mails with trading recommendations based on the “momentum”, or price trend, of funds in a 401(k) account.”

I hate to see this kind of crap become mainstream. One of the virtues of the old pension systems that used to take care of working Americans is the fact that the men at the top making the pension decisions stuffed the pension portfolios with the highest quality companies in the country, dispersing the investment income to the company’s current retirees. It was the dividends from three or four dozen of America’s strongest companies that paid for the lifestyles of retirees in the 1970s, 1980s, 1990s, and even through today (to get a feel for how dramatic one company’s importance to a pension system can be, look up articles about BP’s effect on most British pensions in 2010. When the oil giant temporarily suspended its dividend, many pensions saw their annual expected income drop by 10%, as BP is typically the largest stock holding in any British pension plan and historically pays out a good chunk of cash to shareholders in relation to its stock price).

Basically, for retirement, there are about three to four dozen companies (Exxon, Chevron, Coca-Cola, Johnson & Johnson, Procter & Gamble, General Electric, Wells Fargo, Apple, AT&T, Colgate-Palmolive, Altria, etc.) that act like a firehose and provide most of this country’s retirement income that comes from stocks.

To get more specific, most dividend income in the country comes from these ten companies: ExxonMobil ($10.4 billion), AT&T ($10.1 billion), Apple ($7.4 billion), General Electric ($7.3 billion), Microsoft ($7.2 billion), Chevron ($7.0 billion), Johnson & Johnson ($6.7 billion), Pfizer ($6.6 billion), Procter & Gamble ($6.4 billion), and Wells Fargo ($5.6 billion). Note: These figures may be 6-12 months out of date.

I mention that for one reason: when you think about investing, be it for your 401(k), vacation home, or any ancillary purpose, you shouldn’t think of entities like the S&P 500 as a co-equal group of 500 companies pulling their own weight to propel America forward. Most of the heavy lifting comes from the top 50 or so companies in corporate America. A good chunk of them are mentioned in my “Master List of Stocks” that appear as a tab on the top of this website, which you can read by clicking here. They are the ones with the deep economies of scale, strong moats in the form of durable brands and strong distribution systems, and have such a strong overall model that they can give you cash dividends now  and retain some profits to keep growing into the future. Your job is to get partial stakes in those companies, and then let them do their thing, while you go through life generating more disposable income to invest so you can get your hands on more of these profit engines.

It’s hard to talk specifically about retirement planning because everyone’s situation is different—I know that is a generic copout in most investment discussions, but it is particularly true in this case. I don’t know what your plan options are, what you own in a taxable account, and so on. But as a general rule, I’d want $0.75 of every investment dollar going into the fund that owns the highest quality stocks (assuming the expense ratio is reasonable). For the other $0.25 on the dollar, I’d look to small-cap funds (preferably index), potentially real estate funds, and eventually, bonds once the prevailing rates become less insulting. But I’d want the bulk of my retirement money in the funds that are stuffed with Exxon, Chevron, Conoco, Wells Fargo, JP Morgan, Visa, Coca-Cola, PepsiCo, Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, and so on. Let those companies throw profits my way as I go through life—that sounds fun to me.

I hate services that promote trading in 401(k) accounts because they do you a disservice. It’s all about your personal savings rate and putting your retirement money into something durable that will be shooting off profits in 2040. Those trading services are trying to convince you that you’d be better off owning $1,000 worth of Coca-Cola in April, and then shifting it to $1,000 worth of Pepsi in September.  Or whatever the stock or fund may be. I’m trying to tell you to use those six months to get your hands on both $1,000 worth of Coca-Cola stock and $1,000 worth of Pesi.

Originally posted 2013-09-08 15:07:32.

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