“Rule No. 1: Don’t lose money. Rule No. 2: Don’t forget role No. 1.”
Last week, we examined seven reasons why it could be time to preserve your gains and get your money OUT of the stock market in our article, “Is Now the Time to Go to Cash?” In summary, we examined:
- Rising volatility in the markets
- A stalled stock market teetering on the edge
- Climbing interest rates
- Rising debt—both national and personal
- Bonds losing value
- A slowing real estate market
- And the “smart money” pulling out of stocks and heading for safer havens.
It’s not rocket science to realize that the stock market can’t continue to hit endless new highs. But where can you put your dollars when volatility and corrections rule the day? The economic winds have changed, and it could be time to position your portfolio for a bear market. Here’s are some steps you can take:
First, get honest with yourself. Yes, it’s a hassle to move your money. But how would feel if your stocks lost, say, half or more of their value? Would you regret leaving your dollars all at risk? Does your peace of mind have a value?
Most people feel better having a portion of their money—perhaps even most of it, especially if retired—in investment or savings vehicles with little or no risk. They decide that missing out on some potential upside gains is preferable to losing control of their whole portfolio.
Others prefer to roll the dice and up the ante, even when the economic signals are flashing yellow. Yet those who build wealth and KEEP it take the preservation of wealth seriously.
Your broker will, of course, tell you to “stay in the market,” regardless of the circumstance, the timing, or the market indicators. But no one should care about your money as much as you! So pay attention to market cycles and get honest about your portfolio’s vulnerabilities.
Second, find out your options. Whether your money is in a brokerage account or in a 401(k), 403(b), IRA or other qualified retirement account, find out what choices you have for cash equivalents or secure investments. Contact your HR department or your Third Party Administrator that handles your retirement account. Ideally, you won’t need to remove money from a retirement account (which could incur taxes or penalties).
Chances are, you can move your money from equities into one of the following:
Cash equivalents and short-term solutions:
These first seven options will give your portfolio stability in uncertain times. They are typically available both outside and often inside of a qualified retirement account, although your employee plan may not offer all options.
Note: We don’t recommend these as long-term “investments” as the returns will be very conservative. (For long-term saving, most people are better off with a high cash value whole life policy.) However, sometimes you want to preserve capital now to redeploy into investments later. These are good options for riding out a volatile or bear market, or to use as a temporary “holding tank” after a windfall such as a home sale.
#1: Fixed Rate accounts.
About half of retirement funds and some 529 plans offer an option for a fixed or guaranteed rate fund or account. (Note: bond funds and even funds labeled “fixed income” can still have risk, as this article in TheBalance.com explains. Make sure you are not moving dollars into an environment susceptible to losses in a market crash or interest rate fluctuations.) See more on fixed rate IRAs here. Depending on what your qualified plan options consist of, a fixed rate account may or may not be the same as option #2…
#2: Stable Value Funds.
A stable value fund is designed for capital preservation and will have steady, conservative gains. Typically it is a fixed income portfolio usually comprised of managed, high quality bonds wrapped in a contract from a life insurance company. They go by names such as: Stable Value, Fixed Income Fund, GIC (Guaranteed Investment Contract), Capital Preservation Fund, Principal Protection Fund, Fixed Interest Fund, Guaranteed Fund, or Stable Interest Fund.
#3: Certificates of Deposit.
Yes, a CD can be an IRA. Unfortunately, right now the Big Banks have terrible rates, but there are CD’s out there paying >2%. Always limit CDs to the FDIC insured amount. (You can always have multiple CDs with different institutions.) You can also “ladder” CDs with different maturity dates.
#4: Money Market Funds.
Typically these are quite stable and low-risk, but not guaranteed. In some instances, money market funds can sustain minor losses. This is not our first choice, but it is a much safer option than mutual funds in a volatile environment.
#5: Savings Accounts.
Many savings accounts are paying poorly right now (a fraction of 1%) but explore your options. Some internet banks pay higher interest on their savings accounts than their money market funds with low or no minimums.
#6: Treasury Bills.
T-Bills are backed by the US government and sold for a certain face amount at a discount. (Example: you might buy a $10,000 treasury bill for $9,700.) They most commonly have maturity dates of one, three or six months, but maturity dates can vary.
#7: Treasury Inflation-Protected Securities (TIPS)
These are also guaranteed by the government, and the rate of return is determined by the Consumer Price Index. They can be purchased from the US Treasury or from a brokerage.
Beyond Cash Alternatives
While the above solutions are good for shielding dollars from risk temporarily, you might desire a longer-term solution to beat market volatility. Your options will vary depending on whether or not the money you want to move out of equities is in a qualified retirement plan such as a 401(k), 403(b), IRA. We’ll look at both scenarios, as well as where to put NEW dollars where they won’t be at the mercy of the market.
Long-term solutions (including qualified money)
These investments can help you sleep at night as they are not sensitive to stock market fluctuations:
#8: Life Settlements.
Life settlements are created when seniors decide to sell their life insurance contracts (much like one could sell the deed on their house) to enjoy a living benefit now rather than keeping a death benefit (which may no longer be needed) in place. Typically they are sold to a fund. Life settlement funds are an excellent hedge as they are completely unaffected by markets, interest rates, and the geo-political climate.
Although most investors have never heard of life settlements, they have been used by institutional investors—hedge funds, pension funds, corporations such as Berkshire Hathaway, investment banks, and even life insurance companies—for decades. Only recently has the market opened up to individual accredited investors. This is an excellent growth strategy to use with a self-directed IRA or outside of a retirement account.
#9: Immediate Annuities.
If you are upwards of 75 years of age, a single premium immediate annuity (SPIA) is worth considering. They are an extremely stable source of income that will out-perform cash equivalents.
This is an irreversible move, so consider it carefully! The older you are when you begin an annuity, the better your rate of return will be, so this is a move best made when you are ready to turn an asset into a safe and stable cash flow. Only purchase within an IRA if you are taking disbursements from your retirement account, and do NOT purchase a deferred annuity in any situation.
We can help you evaluate annuities compared to your other options, so reach out to us if you’d like to explore an immediate annuity.
Investment solutions outside of qualified retirement accounts
Life settlements and immediate annuities work inside or outside of retirement accounts. Below are more ways to protect from market volatility outside of an IRA or other retirement account.
#10: Single Premium Whole Life insurance (SPWL).
Most whole life contracts provide a death benefit plus cash value in exchange for annual or monthly payments over a number of years. This is great for savers, but what happens if you have a lump sum? If you are ready to exit the stock market permanently and your goal is to leave a legacy for a spouse and/or other heirs, a single premium policy is an attractive choice. You’ll instantly multiply the worth of your estate and your death benefit will continue to grow—guaranteed.
The downside is that, unlike a regular Whole Life policy, a single premium policy is classified as a MEC—a modified endowment contract. This makes policy loans and withdrawals taxable. Therefore a single premium policy is most appropriate for those who already have ample cash reserves and do not anticipate using the cash value portion of the policy. Find out more here: “Single Premium Whole Life: The Pros and Cons of a MEC.”
If you have been contributing consistently to a 401(k) or IRA or a brokerage account but do not like the options you have in those platforms, it could be an excellent time to place new money elsewhere, including outside of typical “investments.”
#11: A Property.
If you don’t already own your own home, this could be a good opportunity to save a down payment or fund a home rather than your 401(k)—depending on the housing market. You obviously don’t want to buy a house in a market bubble. On the other hand, if you are paying rent, you are GUARANTEED to lose the many thousands you pay your landlord each year! So if you are planning on staying in an area long-term, consider buying if there are affordable options. A recent home buyer on our team just eliminated $24k per year that she used to pay for rent, and her mortgage payment is LESS than her previous rent payment. That’s a win, regardless of where the housing market goes!
Ben Franklin said, “For the best return on your money, pour your purse into your head.” While this is true in any economic environment, it is especially compelling when markets are volatile or appear to be inflated. Can you invest in your own knowledge, skills, health or confidence? That’s an investment worth making! For more, see our article and book review, “The Last Safe Investment is Something You Can’t Buy.”
You’ve got decisions to make!
As you explore your options, take notes or make a chart so that you can compare interest rates, fees, liquidity, and the pros and cons of various solutions. Some questions to keep in mind as you do…
Do you want a short or long-term solution? You might want to move money out of the stock market temporarily, or you may want a long-term investment strategy to protect you from systemic risk of the market. Or you may want the flexibility of either—or both!
One solution or several? When it comes to cash equivalents and safe investments, you may want multiple accounts, even multiple asset classes. This hedges any risk and may offer different advantages in terms of liquidity or returns. Example: put some money into a short-term cash equivalent, some into whole life insurance (our pick for long-term saving), and some into alternative investments.
Decide, then take action. Research won’t make your dollars any safer if you don’t move them out of the market!
How can we help? Whether you want to email us a question or two or schedule a complimentary consultation, we are here to help! We specialize in alternative investments and building wealth outside of Wall Street. We can help you prepare your portfolio for a bear market—or any market!
To find out more, download our complimentary ebook, Financial Planning Has Failed.