How to Invest Your 401(k) After the Fall Election

NEW YORK (TheStreet) -- After a presidential election the economy typically cools down due to lack of post-election stimulus. Today the gross domestic product growth is at 2% and will be reduced by 3.5% in 2013 due to the end of Bush tax cuts and stimulus programs in addition to mandatory federal budget-balancing cutbacks. This means GDP will be a negative 1.5% growth rate in 2013. Also, state governments are cutting back expenditures and raising taxes.

Investors want to know how to protect their 401K and other retirement assets from the coming stock market crash.
The economy typically cools down after a major election season, but your portfolio doesn't have to.

It is more important to avoid losses than to capture huge gains. For example, if you own a $100 stock that drops 50% and then increases 60% your stock will go to $50 and then increase to $80. To break even it would need to go up 100%. So minimizing risk rather than chasing huge gains should be the investor's goal, especially in 401K's and other retirement accounts.

The S&P 500's 10-year price to earnings ratio is now 22 and should be at 15, so the market is 50% overvalued and thus needs to decline by 33% to reach fair value. This means investors should plan for stocks in their 401(k) to drop in price.

Investors should increase their allocation to investment grade bonds and reduce their allocation of stocks. If you're worried that because bonds pay a very low rate of interest that you should avoid them, just remember that if stocks crash then bonds or cash may be the only reasonable asset to own.

Once the stock market has bottomed out then investors should sell bonds and move into stocks. Be aware that the economy could be in a Japan-style soft depression for several years and thus stocks may not recover from a crash until 2016 or 2018.

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