Business

Dear John: What’s the best way to invest 401K?

Dear John: I have my 401(k) retirement fund heavily weighted toward bond funds, but am now worried, since May had very poor bond-market returns.

Then again, I feel like the stock market is overvalued now, too. Should I go 100 percent into cash, or something like 40 percent bonds, 40 percent stocks and 20 percent cash? I’m trying to avoid any large losses like I got in 2008 when I was 100 percent in stocks. Thank you! Steve.

Dear Steve:

The honest answer is: Who knows?

Bonds, of course, have been in a tremendous, decades-long bull market. Put another way, that means interest rates are at their lowest level in more than a generation.

The price of bonds, as you probably know, moves in the opposite direction of interest rates.

With rates as low as they now are, there’s little room for more bond-price appreciation. But prices could hold where they are, especially if the Federal Reserve is successful in its quantitative- easing (QE) program.

As I’ve been saying, QE hasn’t done very much to improve the US economy. But the Fed’s program has kept interest rates low. In that sense, it has been working.

The question, of course, is: Will QE keep working?

I suspect that you wrote to me because bond prices have been falling (and rates have been rising) recently.

This rise in interest rates could be just a temporary thing, traders playing games. Or it could be the start of a rebellion against money-printing operations that are seen as debasing sovereign currency. If it is a rebellion, interest rates could rise — and bond prices fall — by a lot.

So, are you willing to stay in bonds despite the limited upside potential, even though this could be the start of something big on the downside? You have to answer that yourself.

Stocks are really an afterthought. Stock prices in the US are up a lot this year because the Fed is printing so much money, and investors are looking for a place to park this money. Stocks are rising for the same reason real estate is going up, and fine art and antiques: People need to do something with their dough.

If there’s a sudden jump in interest rates (and a decline in bond prices), stocks are also bound to go lower.\

All this assumes that there will not be a historic rigging of the stock market. As I said, QE has mainly been working to keep interest rates down, bond prices up and stock prices rising. Stocks have been the most obvious success for the Fed, and Ben Bernanke’s crew isn’t going to let stock prices decline without a fight.

Can the Fed keep stocks higher even though the corporate earnings and revenue that support those higher prices are weakening? I’ll give you the definitive answer: Maybe, or maybe not.

I always think of it this way: If bonds and stocks go up 20 percent (or pick a percentage of your choosing), will that change my lifestyle by much? Will I suddenly start living it up, or will the changes be modest?

On the other hand, if stocks and bonds fall 20 percent, will that affect my lifestyle?

I’m very conservative on these things because I’ve seen enough bubbles burst to know I don’t trust Wall Street. And a 20 percent drop in my assets would hurt the wonderful life I lead.

So until I find a money manager who can pay constant attention to the stock market — and hightail it out of there when the computerized sell orders strike — I’m not going to play Wall Street’s game.

Hope that helps.

Send your questions to Dear John, The NY Post, 1211 Ave. of the Americas, NY, NY 10036, or john.crudele@nypost.com.