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Ihad almost 90,000.00 in my 403 right before the market disaster in 2008. I am finally up there again. how do I keep from loosing it in the event of another crash?

Mar 18, 2013 by Joseph from Mt Olive, NC in  |  Flag
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5 votes

Joseph,

The amount that an account can lose during market downturns is directly related to the structure of the account. Think of your portfolio as a Chili Recipe. (I know it sounds funny, but bear with me). The more pepper in the Chili, the hotter it likely will be. Some people can handle hot chili, others cannot. The key to enjoying the chili the most is having the chili hot enough to "titillate the taste buds" but not ruin the whole bowl.

Similarly, small stocks are more volatile than large stocks. They typically grow more, but they also drop more when the market turns bearish. Bonds are less volatile than both of them, and often go UP when the stock market goes DOWN, but historically do offer as much growth opportunity - especially now with interest rates at historical lows. The VALIC guaranteed interest account in your 403b is designed not to go down at all, but to hold its value when the market goes down. On the other hand, it doesn't go UP when the market goes up, either - and will not give you the high rates of return that we all enjoy.

You are pretty much stuck with the investment options within your 403b, so the key is to maximize the use of these tools (ingredients for your Chili) as best as you can. So now you have to focus on being a good INVESTOR - working on YOUR SKILLS, not worrying about what you do not have or cannot use.

The key to being a successful investor is to properly measure your risk tolerance. You need to have an honest conversation with yourself and your wife. Decide exactly how many dollars you can bear to see your account go down without losing sleep (because the markets WILL fluctuate). For example, if the market goes down 20% - and your account is 100% in stock funds - then your account, at $90,000, will likely drop $18,000. Is this too much? Can you handle it?

If the answer is that you can only bear a 10% ($9,000) drop, then, given the fact that the stock market experiences a 20% drop every 3 years - maybe you need to only have 50% of your account in stock funds (Small, medium, and large stocks) and the remaining 50% in bonds and the VALIC guaranteed account. In this manner, you will have protected your account from the stock market drops that you are worried about - but you also will not likely get the high rates of return that you will need to offset the inflation worries that you have mentioned. What about a 40% drop? This occurs historically about every 2 decades or so (we didn't have one at all in the 80's or 90's - but we had 2 in the last decade).

Ultimately, the ONLY way to combat the inflation you are worried about is to have your dollars grow faster than the rate of inflation. This is not without pain - because the best hedge against inflation has historically been stocks (no, not gold - especially over the long term). The problem is that stocks do poorly during times of economic crisis and fear, thus shaking out weaker-stomached investors and making them fodder for financial pornography (free internet advice or investing magazines) - lining the pockets of the investment media, but only confusing the average investor with conflicting and flip-flopping advice.

My advice to you at the point that you are now is to consult with a financial advisor. I've been doing this for almost 20 years - and I can tell you from dealing with thousands of people, that FEW (microscopically FEW, in fact) people do as well on their own as they would by finding a good financial advisor. There are tons of articles on this site about how to pick one, so roll up your sleeves and dive in. You'll find the one right for you.

You owe it to yourself to find a good one and start working with him or her for the long term.

Best of luck. I agree with your assessment on our country, by the way.

Jon Castle http://www.WealthGuards.com

2 Comments   |  Flag   |  Mar 18, 2013 from Jacksonville, FL
Jonathan N. Castle, MSFS, CFP®

Correction - bonds do NOT offer as much long-term growth as stocks (historically). Sorry for the typo.

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Flag |  Mar 18, 2013 near Jacksonville, FL
Joseph

Jonathan, thank you for you advice. Have a blessed day sir.

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Flag |  Mar 18, 2013 near Mt Olive, NC

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5 votes

You did the right thing by staying in the market and riding the recovery back. But, if you don't want to go through that again, I don't blame you. First, we have had two crashes in the years in a short time - 2000 to 2007 and that is extremely unusual. It would be unprecedented to see a third without going through a major depression. Second, the 2000 crash was the end of the dot.com bubble when the market went to ridiculous over-valuation. I thought that was really easy to see coming and I got my clients out. The 2007 bubble was a bubble in financial speculation and overleverage by the big banks along with bubbles in real estate and personal indebtedness. I don't see that repeating itself either. The market now sells for a reasonable value, which also makes a crash unlikely. Still, for protection you can explore stock funds that are less volatile. You can also set a mental stop-loss in which you transfer to short-term bonds when your account drops, say 15%. Of course, the problem is knowing when to get back in. Other options are to change your allocation to include some different types of assets like alternatives or floating rate bonds or low duration bonds. Unfortunately, most company retirement plans are horrible when it comes to offering sufficient bond choices and rarely offer alternatives funds so you may not have the choice. If you end up leaving the company at some point, roll your 403b over to an IRA where you can have more choices in reducing risk and start working with a professional fee-only advisor.

Comment   |  Flag   |  Mar 22, 2013 from Charlotte, NC

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3 votes

You didn't lose it then, nor will you lose it in the future.... IF you do not sell.

Comment   |  Flag   |  Mar 19, 2013 from Port Washington, NY

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Jason Hull Level 20

Joseph-- Congratulations for your discipline in staying the course. Unfortunately, there are no guarantees in the market. The only safe place to keep your money is hidden in a safe underground in a location where only you know. The problem with that approach is that it's a) a pain in the butt to find a safe and a location, and b) inflation will, over time, decimate the value of that money you hid in the safe. If you still have plenty of years left in your investing horizon, then continue to stay the course. I recommend periodic value cost averaging ( http://www.hullfinancialplanning.com/value-cost-averaging-or-dollar-cost-averaging/ ) and continuing to stay invested in the markets. It's not a guarantee, but it gives you a better shot at beating inflation. If you try to time the market, you're likely to shoot yourself in the foot ( http://www.hullfinancialplanning.com/play-the-market-like-a-hedge-fund-manager/ ). I know this probably isn't the answer you wanted; there is no silver bullet that tells you when to get in and when to get out of the market. If that was the case, I'd be retired, and so would a lot of other people. It's just not that simple. The most prudent course, in my opinion, is to continue to periodically invest in the market, don't watch the markets every day ( http://www.hullfinancialplanning.com/dont-watch-cnbc-before-talking-to-me-even-if-the-market-is-up/ ), and focus on the important things in your life.

View all 6 Comments   |  Flag   |  Mar 18, 2013 from Fort Worth, TX
Joseph

I don't believe I said anything about gold medallions or paid celebrity endorsements. Ever think a government would tell the banks that they are now collecting "a new tax " on money sitting in a savings account? I just don't want to loose alot of money while people at the top get bailed out and then get million dollar severance packages and I am down here struggling to rebuild again.

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Flag |  Mar 18, 2013 near Mt Olive, NC
Jason Hull

Sorry if I offended you there.

I wasn't a fan of the bank bailouts either; I think the wrong people got off scot free and the wrong people (the taxpayers) paid for it. However, gold a) doesn't beat inflation (http://inflationdata.com/Inflation/images/charts/Gold/Gold_inflation_chart.htm), and isn't immune to seizure either (http://www.presidency.ucsb.edu/ws/index.php?pid=14611%2526st=%2526st1=&reason=0). If you really are that concerned about dealing with the remote possibility of a downside event that drastic, you should hide your money in a mattress. It probably won't be worth anything anyway due to the fiat currency. I don't personally believe that is going to happen.

I'm trying to help you understand that if all you do is prepare solely for the remote contingency, you're going to be in pretty dire straits the 99.99x% of the time when that doesn't happen. If I feared going on the road because of my perception of the "idiot drivers" out there (it's ALWAYS the other person, right? :-) ) then I'd never leave my house, and I'd miss out on all of the experiences that the world has to offer. If I refused to get on an airplane because of fear that someone was going to light his underwear on fire and crash the plan, I'd miss out on a world of other cultures and adventures AND the terrorists would win. You can be aware of those possibilities and prepared to react, but if you take the argument of government seizures/inflation/fiat currency to reductio ad absurdum, you really would buy beans and bullets and hide them in a bunker. Everyone's existence, save from the few people who truly live off the land, depends on some level of trust in other people doing what they say they are going to do.

You can't get reward without risk.

If you don't invest in something which beats inflation, then over time, the money which you have will be able to buy less and less. Think of Cokes. You're 44. You can remember the days when Cokes cost a quarter. They don't cost a quarter anymore. You can remember days of sub-$1 gallons of gas. That's a thing of the past.

To be able to buy the same amount of stuff in the future, you have to beat inflation. Simply preserving your capital won't succeed in doing that. You could put it in a mattress or a money market or something which won't lose money, but in 21 years, your $90,000 will buy half (or probably less) than it does today. The statement of wanting not to lose money is one which is driven, understandably, by fear. You remember the pain of losing that money and you don't want to go through it again. It's called selection bias. It's very personal - you lost money. You fear losing more money. You want to make sure your kids are taken care of. However, you can't let fear take the wheel of your investing life. You were brave enough to set aside money and put it into the markets, despite what was going on in the world around you. That's the attitude which will get you through to the good times in the long term. As hard as it is to do, it helps to be unemotional about money.

Thinking only about capital protection, not losing your money, is like playing prevent defense all the time. How many times have you seen a football team get beaten because they went into the prevent defense too early? That's what you're risking. You can't be a fearful investor because you'll make the wrong trades at the wrong times.

If you want to buy some precious metals, by all means, do so. Just don't take out all of your money from your 403b and spend it all on precious metals. You'll a) be able to buy fewer precious metals because of the 10% penalty, b) you won't beat inflation, and c) you'll be exposing yourself to a different type of risk. Take a look at the 5 year chart of the USAA Precious Metals and Minerals Fund - a fund I'm invested in - https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1363621455590&chddm=495006&q=MUTF:USAGX&&ei=TDZHUejTOqfUlQPfbA. You'll see that it's not doing any better. Compare it to the USAA S&P 500 index fund (which I'm also invested in) - https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1363621511679&chddm=495006&q=MUTF:USSPX&&ei=kTZHUdAPp9SVA99s

Flag |  Mar 18, 2013 near Fort Worth, TX

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2 votes

Joseph, with any investment, there is risk. You need to determine what level of risk you are comfortable with. Understanding how you got hurt in 2008, look at how your money was invested then. It would probably be safe to say that you want to have less risk than you did back in 2008. There are risk analysis questionnaires online or at any financial planner or institution. As simple as it sounds, even after taking a risk analysis, you want to be able to sleep at night. Plan your investment strategy accordingly.

1 Comment   |  Flag   |  Mar 18, 2013 from Delray Beach, FL
Michael Steven Greenberg, CFP®

As others have mentioned, there is a concern about inflation. Well, inflation is a risk as well. It is very difficult to advise someone to invest more aggressively than they feel comfortable with, but it is important that you both keep up with inflation and that you not outlive your money.
A well diversified, balanced portfolio can mitigate a good degree of risk. Seek advice from local advisors. Ask questions. Find someone you feel comfortable with.

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Flag |  Mar 18, 2013 near Delray Beach, FL

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Joseph, as mentioned above, and, there is a lot of great information there for you to digest... There is a lot of risk whenever investing your money. As such, to some, 90,000 isn't much... to others it's a lot... Find a good, recommended CFP in your area that will work on an hourly or fee basis and have them run a risk tolerance profile, then, an asset allocation for you based on your personal situation. Investing has changed a lot over the years, and is something you need to pay close attention to, especially as you get closer to the retirement years. A reputable Certified Financial Planner is a good place to start... interview a few, and work with someone you feel comfortable with... someone who understands where you are, where you want to go, and makes sense of how and what you need to do to get there...

Rod Miller, CFP, CLU, ChFC

Comment   |  Flag   |  Mar 24, 2013 from Springfield, MO

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