How I Plan To Invest The Assets From My 401k Rollover

dividend growth investing, option strategy, put options, long term, 401k, Rollover IRA
Investing a lump sum from a 401k Rollover

I think we've all had the dream of getting a phone call or a letter in the mail informing us that we had some long lost rich uncle that just left us a huge sum of money after he passed away.  Who wouldn't want to be in that situation?  One day you're grinding away at work and the next you immediately jump up a few notches on the wealth scale.

Of course I think we should all take our financial future into our own hands by living below our means and investing the difference.  That route has a much higher likelihood of success than hoping you have some long lost rich uncle out there.  But one can dream, right?

You might not think you'll ever come into a large amount of money to invest although it's more common than you think.  If you're doing the right thing then you're likely using a 401k or other workplace retirement savings program to save for your future.

Gone are the days of working at the same company for 30-40 years, getting a gold watch and calling it a day.  The average person will work between 10-15 jobs in their lifetime spending less than 5 years in each position.  If you're saving in your 401k and change jobs then you'll find yourself in the situation of how to invest a lump sum of money.  According to Fidelity in June 2015 the median 401k had a balance just over $90k.  To me that falls well into the lump sum category.

Since getting laid off I've been examining some options on where to move my 401k balance so I'm facing the situation of how to invest my ~$140k+ of assets.

How to invest my lump sum?

I'm debating 3 different strategies although they're really just different versions of the same thing.  If you've been paying attention to my blog over the last couple months you've likely seen a large up tick in the amount of options transactions that I've been doing, primarily via selling put options.

I had gotten away from using put options as a way to generate income or buy shares at a discount.  If done correctly you're essentially getting an opportunity to set a limit order and get paid until it triggers.  Put options are a way to boost your income while buying quality companies, to me that's the best of both worlds for the long term investor.

Now there's no such thing as a free lunch and unfortunately put options don't escape that axiom.  Although I'd venture to guess that if you stick to many of the dividend growth companies that we're all looking to buy the risk of permanent loss of capital is much lower.  

Anyways let's get back to the task at hand.

Option 1:

Clearly I have a desire to use put options within my Rollover IRA.  So I want to earmark at least a portion of this capital for the purpose of option writing to generate income.  Originally my thought was to set aside about 50% of the capital exclusively for options.

The other half I was originally intending to keep in cash until we get something that really upsets the market.  Regarding the market as a whole I think it's expensive; however, just because the market overall is expensive doesn't mean that there aren't values available it's just nowhere near as easy to find as a few years ago.

The values that I am seeing still aren't firesale prices, although those don't exactly come around too often when you're dealing with some of the biggest and most widely followed companies.  That really only happens in the event of a market event.  The values I'm seeing are more along the lines of the high end of the fair value range.  So making purchases is defensible, but it's not the best deals we're likely to see.  

Of course just because I see headwinds for the market doesn't mean that the market will cooperate on my time frame.  I'd love to get this capital invested today IF I could find good values which is the big problem with keeping the cash on the sidelines in the hopes that the market will have a hiccup in a relatively short time period.

That's led me to consider other options...see what I did there?

Option 2:

My second consideration is a slight adjustment to Option 1 and would keep the 50/50 split between a more active options strategy and keeping cash on hand.  Where it differs though is that the 50% that is earmarked for cash would be slowly dollar cost averaged into some of the best companies in the world.  

That would still allow me to generate income/return via put options with half of the capital while simulatneously allowing me to build up positions.  As I mentioned earlier I'm not naive enough to think that just because I see headwinds for the markets necessarily equates to it doing what I expect over a short time period.

The 50% that would be dedicated towards keeping a cash buffer while using dollar cost averaging to build positions for the long term works out to around $70k.  If I made say $2k total worth of investments each month in $500 increments that still gives me around 35 weeks to get fully invested.  So the cash wouldn't be "eaten" up too quickly and would still leave significant reserves to take advantage of any major market events.  I mean we're still talking about 1.5 years to get half of that half invested if I do $2k per month.  

Normally I wouldn't want to make such small purchases because commissions will be a big drag on each purchase.  My broker typically charges $7.95 per trade so costs would eat up about 1.6% of the investment capital assuming $500 increments.  Considering the big draw for investing on your own is that you can get costs much lower than investing via mutual funds/ETFs that wouldn't make since.  However, when I rolled over my 401k my broker offered me 500 free trades so costs won't be a negative to making such small purchases.  

Option 3:

The 3rd option is kind of an offshoot of Option 2 except I would split the funds up into thirds with 1/3 being used for options, 1/3 for a cash buffer and the final 1/3 used to DCA.


Originally I was leaning more towards Option 1; however, as time has gone on and I've given it more thought I'm leaning towards either Option 2 or 3, although those two are kind of one in the same.

In the case of a big decline in the markets cash is king; however, the big problem with that is that you never know when a market decline will happen.  Yes, valuations are stretched, debt levels around the globe have been pushed to the limits, global growth is slowing, we're due for a recession, interest rates are set to rise...although this has been a concern for at least the last 2 years now.  

That's the biggest drawback to waiting in cash for the markets to provide a big fire sale.  You never know when it will happen.  Plus you have to have the conviction to buy those companies in the midst of really troubling times which is much easier said than done.  While I have no problem doing so, in theory, I've yet to be in a true bear market "world is ending" scenario during my investing "career" so I don't know for sure how I'll react.

I don't want to become completely preoccupied with the short term while neglecting the long term goal of this portfolio.  So there needs to be a balance between both time frames and I think either Option 2 or 3 gives a good balance between the two.  

Have you ever been in the situation of needing to invest a lump sum?  Which of the 3 options do you think is preferable or do you have another suggestion?

Please share your thoughts below!  

Image provided by Prakairoj via FreeDigitalPhotos


  1. I'm not very familiar with options but are they suitable for a 401K? Also I would put the cash to work so you can keep the compounding going.

    1. DL,

      I see no issue with using options in a 401k Rollover IRA. There are limits because you can't use margin like I do in my normal taxable account; however, I've also never had $140k cash just dropped in my taxable account either.

      My primary strategy will be to use put options as a way to set limit orders on companies that I want to buy at a prices I'm comfortable buying. Except I get paid if it doesn't hit.

      Although you bring up a valid concern that I share and that's keeping the compounding going. Every day that cash is on the sidelines it's not working/compounding although I also see value in keeping cash on hand to really take advantage of opportunities especially since I won't be adding any more cash to this account other than a future potential 401k Rollover into this account. That's why I'm thinking that I need to have a plan to DCA into some of the great companies out there and since I have the free trades I can afford to do so in much smaller increments that I normally would.

      Thanks for stopping by!

  2. There's always good values if you look. Some names that seem attractive today (to me at least) are Lowe's, Home Depot, Public Storage, Unilever, Coke, Nike, Diageo, and Cardinal Health. All of these companies are high quality, but have come down between 15-30% recently, making them strong buys imo.

    1. Anon,

      That's why I think I still need to invest some of this capital via outright buys. I'm working now on a list of buy and hold forever dividend growth companies and the plan is to then just DCA into the best values at the time each month. That'll keep me from investing it all at once, which isn't a big deal over the long run however I know if I invested it all and immediately saw red everywhere that could make me deviate from my plan, while also keeping cash on the sidelines for bigger buys in case the market does go haywire.

      I like many of the companies that you suggested and have exposure to many of them via starter positions or put options.

      Thanks for stopping by!

  3. Hi JC,

    Interesting choices but personally, it's too much work for me to try to obtain some basis points of over-performance. I rolled the 401k from my former employer into a Traditional IRA account at the beginning of last year. It was about $220k, but I just allocated it per my target asset allocation (about 70% stocks / 30% bonds) so it's 100% invested.

    I keep my retirement accounts separate from my Income Fund and its purpose isn't about making me rich as keeping me from being poor, so I avoid taking on extra risk and just use low cost index funds.

    I would rebalance from bonds to stocks if there was a big market correction, so the bond portion provides so-called dry powder, or at least only slightly damp powder.

    Best wishes,

    1. DL,

      Good to hear another approach. Did you invest primarily via mutual funds/ETFs or did you go with individual stocks? If I wanted a more hands off approach I would have just gone the MF route and gotten it invested over a relatively short time.

      However, since I like and prefer the individual companies route I want to be a bit more selective with the funds. Although I need to balance that with building positions up too which is why my plan is to DCA into some excellent companies over time while also keeping some cash on the sidelines for a real sale in the markets.

      Thanks for stopping by!

  4. Another option is sort of like your third option, but to invest the 1/3 of DCA money in a lump sum (keeping 1/3 in cash and 1/3 for options). I don't know about you, but I think I'd find a reason not to keep buying routinely somewhere along the way to getting my DCA money invested. Buying in a lump sum is equivalent to front-loading - which tends to be the better choice. ( You'd still have a chunk of cash for corrections, a chunk for options, and start the passive income stream rolling right away and remove your (potential) lack of commitment to the plan.

    1. RoseRelish,

      I'm just not comfortable throwing down a huge chunk of cash at once especially in just a broad market index. No I won't get crushed over the long term; however, I think I'll be stuck in "what if" mode for a while if there happens to be a correction in a relatively short time frame.

      Personally I think my temperament would allow me to stick with a DCA plan. I'm a big believer that there's always some kind of value in the markets when you're talking about individual companies. I've got a list of 5-10 companies that I wouldn't mind adding at the current prices. They aren't great values, but they are closer to the middle of their fair value range rather than the high end like many of the companies I want to invest in are at currently. To me the next step to really committing to a DCA plan is to come up with a list of 15-30 companies that I want to build up long term positions in and then figuring out some kind of simple screen to find the best value among them each month then just DCA into the best ones while building the positions up over time. That's the way I'm currently leaning for getting some of this capital invested because like you said I want to get the passive income stream rolling and spitting out dividends for me to reinvest so I don't want to take forever to just get started. The longer I sit in cash I think the more I'm going to want to hold on to it to try and make up for the lost time via a big investment during a market correction.

      Thanks for stopping by and sharing your thoughts.


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