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How can I protect my money in light of the coming financial collapse?
May 20, 2014 11:04 AM   Subscribe

There has been a lot of talk about an imminent financial markets bubble and I find that I am heavily invested in the S&P500 through an IRA (rolled over from a 401K after I was laid off). I also have a relatively small amount invested through a standard brokerage account, but the majority is in the IRA. I don't know jack about sigma events or black swans, but I can recognize when the chatter is starting to form a cohesive message. I also know that I have a ton more exposure now than in 2009. In fact, the post crash boom years have been quite good to me. My question is obviously, is there a proven strategy to protect against a coming financial crash? At what point do I pull the trigger and put everything into bonds? Is there a hedge against a collapse? My fantasy is that I pick the right time to pull everything and then clean up post crash on rock bottom blue chip stocks.

More info: I'm 38, currently single and childless (though I really hope that changes before 40), and while I am currently unemployed I fully expect to be gainfully employed soon making a very good salary.
posted by MajorDilemma to Work & Money (14 answers total) 11 users marked this as a favorite
 
You can't time the markets. Just invest in a normal strategy that's the appropriate blend of stocks and bonds for your age and time until retirement, and you'll be fine in the long term.
posted by hwyengr at 11:09 AM on May 20 [4 favorites]


You are attempting to be a market timer based on a gut feeling. In truth, you are just guessing. Amateurs who guess at the market pretty consistently fail. You might guess right, but odds are highly against you. A virtually sure fire way to do reasonably well is available, though it lacks in any kind of sexiness:

1) Spend less than you make
2) Buy low cost indexes
2) Contribute 10% or more of your income to savings

Just keep doing this. Over and over and over. The biggest problem for people in the last crash was if by happenstance they did get out, when to get back in? If you had just stayed the course, you would be comfortably ahead of where you were before the crash. Timing in these things is pure guesswork in both exit and re-entry, and the average retail investor will generally guess wrong in BOTH DIRECTIONS. Many many small investors exited 1/2 way down or more, then did not re-enter... If you stayed balanced and rebalanced you are quite far ahead of where you were pre-crash.

The closest hedge there is to collapse is money market & allocation to metals. If you really believe in collapse the best hedge is guns and lots and lots of ammo. Or, you can just let time be your friend and do the three steps above.
posted by jcworth at 11:12 AM on May 20 [12 favorites]


The fact that you are asking this question suggests that your investment strategy is too aggressive for your risk tolerance. If you want to worry less about this stuff, then sure, sell some stock and move those assets into something less risky. But this advice has absolutely nothing to do with timing a crash.
posted by Seymour Zamboni at 11:19 AM on May 20 [5 favorites]


Let's perform a little thought experiment. Say that well-informed people knew when the crash was coming. First of all, they wouldn't be telling people on a message board. They would pull out of stocks, etc. Well, that would change the market. It might well have the effect of causing short-term traders to rush in and snap up stocks at bargain prices. The crash then is postponed. A genius economist once said, "Markets can remain irrational longer than you can remain solvent." You can't time the market. Period.

Furthermore, it's not clear that traditional hedges like bonds provide much protection. Interest rates, especially long-term interest rates like you might use to finance a retirement, are near all-time lows. Since bond prices drop when interest rates go up, you could well find yourself losing lots of money on "safe" bonds. There is no safe harbor; if there was, you would find all the pension funds, who have more or less the same problem you have, have already gotten there. You cannot help yourself by trading; the empirically best number of trades per year is zero. Let that sink in for a minute.

The only thing an individual investor can do is reduce expense ratios to the bone, diversify effectively, and do whatever you can to contribute over time and not panic when the market drops. Realistically, the best option is sign up for direct deposit of 10-15% of salary into a cheap "target date" fund like Vanguard or Fidelity, and forget it is even there.
posted by wnissen at 11:29 AM on May 20 [6 favorites]


The solution (such as it is) to this dilemma is to spread your assets among a few different classes: domestic stock funds, international stock funds, and bond funds. Stocks and bonds have not historically been closely correlated, so there is no meaningful relationship between periods when stocks will do well and periods when bonds will do well. This is true to a lesser extent regarding domestic and international stock. In short, there will be years that domestic stock will do well, years that international stock does well, and years that bond funds will do well. There will also be years when these asset classes do poorly.

Part of your job as an investor is to choose a mix of these assets that is comfortable for you: over the long haul stock funds have greatly outperformed bond funds, but stock funds also have substantially more variance year in and year out. So in 2009, stock funds just got clobbered, while bond funds generally went up slightly. But in 2010-14, stock funds rocketed, while bond funds eked out returns or gradually declined.

If you were like my parents, you would have freaked out when all of your stock funds declined, and plowed the money into bond funds--thus getting the worst of both worlds--taking the hit from the decline of stock funds and then missing out on their recovery while losing even more money when bond funds then dipped.

So your plan sounds great, right? Just predict ahead of time when each asset class will go up and down. As a number of people upthread have pointed out, you can't possibly predict this. The way to win the investing game is to invest for the long term. You need to make time work for you.

But most people aren't comfortable with this. They don't want to trust that when stocks go down by 40%, they'll recover to almost triple their original value in five years. The best practice, then, is to keep part of your portfolio in stock (both domestic and international), and part in bonds. By keeping part of your portfolio in bonds you'll substantially reduce its year to year volatility, but you'll also inhibit its growth. But--because you can't predict in advance when stocks will be up or down, you should always want to have a pretty good chunk of your portfolio in bonds. For instance, think about retirement--you're not going to know today whether the market will be way up or way down at your retirement date, so if you just let everything ride in stock funds, you risk that you'll retire at a down cycle. Think of people who planned to retire in March of 2009.

All of this is a very long way to say that you should follow jcworth's advice. You should stay the course. Put enough in bonds that matches your tolerance for seeing your portfolio rise and fall year after year (but also bear in mind that you need to take enough risk to stay well ahead of inflation). Put your investments into index funds that have the smallest possible expenses. Leave your investments there. Maybe 2 or 3 times a year, check in on your investments: if your goal is to have 30% of your portfolio in bonds, are you still at 30%? If you're way off, rebalance so that you can return to that 70/30 balance that you're comfortable with.

Based on what you're saying, you have too much in stock. So, if I were to take action, I'd take some of that IRA and put it in a bond index fund with Vanguard. I'm your age, and I'm at about 26% bonds right now, and I'm gradually increasing this as I plod toward retirement. Now, if another 2009 happens and you have 26% in bonds, it's not like you're going to be jumping for joy. 74% stock is still a lot of stock. But just stay the course and it will recover over time.

By the way, if I'm wrong about that and stocks don't go up over the long-term? We'll all have rooftop gardens, be canning our own vegetables, hiding behind triple locked doors and fighting off our hungry neighbors who don't have the space or aptitude to grow their own food. In other words, we're all pretty much screwed.

That's it, that's the plan.
posted by MoonOrb at 11:47 AM on May 20 [15 favorites]


Unless you're a professional in the finance industry you should not be trying to pick and choose individual stocks and bonds or even a non-standard investment strategy for your mix of stocks and bonds. Even finance industry professionals fuck up at this all the time and they have years of education and technological tools to help them.

Just put your money in a Vanguard Target Retirement Fund and leave it alone. You tell them the decade you expect to retire and they will automatically rebalance your portfolio as you age so that you'll always have an appropriately diversified mix of stock index funds, bond index funds, and money market funds following best practices for risk-vs-reward relative to the number of years until you'll need the money.
posted by Jacqueline at 12:17 PM on May 20 [2 favorites]


If you want to soothe yourself, look at the market over the long term. See how its performed over the last 30 years. Lots of ups and downs. I stay invested and try not to look at it too often.

You can't time the market. Either you have faith in it, and you invest, or you don't and you keep your money in a mattress.

Either way it's a risk. What if you're wrong and you miss out on crazy growth while your money is in the Serta?
posted by Ruthless Bunny at 12:26 PM on May 20 [1 favorite]


As others say, you want to invest the IRA in low cost mutual funds or ETFs. If you don't like your current broker, change, but the market's pretty competitive so chances are your current provider will give you sufficient options.

You basically have two choices:

1) How much of your portfolio do you want to put in equity funds and how much in bond funds?

2) How do you want to split your equities between large cap domestic (SP500), small cap domestic, and international. Go find some guidelines, but anything like 1/2, 1/4, 1/4, or 1/3, 1/3, 1/3 is fine.

You can't time the market in the sense of taking the money out the day before the crash, but it's true that because stock valuations are relatively high, the expected equity growth is lower than it otherwise would be, and the chance of a crash is somewhat higher. Therefore, it's reasonable to put a little less in equities and a little more in bonds than you otherwise would.

Still, remember that you've got a few decades. Let's say the market really is 20% overvalued; that implies that future annual returns will be something like 1% lower over the next 20 years. But stocks historically have outpaced bonds by much more, so they are still a good deal.

Lifecycle funds are one approach, and if you want less risk, choose a date that is closer than your actual retirement date.

Some sample portfolios here.
posted by Mr.Know-it-some at 12:32 PM on May 20 [1 favorite]


I am going to answer your specific headline question "How can I protect my money[?]" and my answer is: by engaging some critical thinking skills.

No, really, this is responsive to your question. Go back and look at that FPP you linked to. The first link in it goes to some Marketwatch commentary by Paul B. Farrell. Go look at his archives - literally all of his columns are either "sky is falling" full-on panic, or random crap unrelated to financial markets. Here's a random one from early 2012 predicting some sort of crash or other - the stock market has increased almost 50% since that prediction. Etc. He lacks any predictive credibility whatsoever.

The third link in the FPP, about how World Cup years are bad for financial markets is plainly tongue in cheek. I mean, I'm sorry, but it is transparently not intended to be taken seriously as any sort of predictive anything. It starts with jokes about English soccer sucking and admits 2/3 of the way through that "it’s not a perfect fit," being off by a couple YEARS at times which, for financial predictions is polite code for "100% wrong." Savvy financial observers are supposed to look at that chart, laugh a bit, and close the tab. If you are taking it any more seriously, the joke is on you.

Finally, consider that if you had invested your entire life savings in the S&P 500 in the middle of 2008, literally right before the last major collapse including a 57% decline, and held onto it, doing NOTHING until the present day, your investment would be worth half again as much now as it was then (including the entire crash!!) for an annual return of over 8%.

So, seriously, consider your sources and think hard about them. Still, if you are uncomfortable with your current allocation to equities, there is some fine advice above about diversification.
posted by Joey Buttafoucault at 12:47 PM on May 20 [8 favorites]


One of the most important things you can do is make sure you are paying the smallest fees possible, which for S&P 500 would be something like Vanguard or Fidelity. If you are in a 401(k) or IRA that doesn't allow you to invest in the lowest cost index funds, then get out of that plan if you can (some plans offer a "self-directed brokerage account" option).

I can recognize when the chatter is starting to form a cohesive message

No you can't, and even if you could, that message could be completely wrong. Don't try to outguess the market. The reason you are in a diversified index fund is because you could be completely wrong if you picked individual stocks. The same logic applies to market timing.

Decide for yourself, but personally I'd say at the age of 38 you could still be quite aggressive by going heavy on stocks. Sure stocks will go up and down, and sure they might take a big dive or two or three before you hit retirement, but over a long period of time your overall return should be decent.

If you do pull out your money and the market falls, don't fall into the "I'm a genius" trap either. If you think you are smarter than other investors because something happened that you predicted would happen, don't expect to have the same results next time. Even Warren Buffet is no Warren Buffet.
posted by Dansaman at 1:02 PM on May 20 [2 favorites]


You're asking two different questions.

Is there a proven strategy to protect against a coming financial crash
Yes! Whenever the stock market goes down, refuse to be afraid. Just keep buying, and don't sell. Be consistent.

[Is there a way to] pick the right time to pull everything and then clean up post crash on rock bottom blue chip stocks
Nope. If there was a way, everyone would do it, and then it wouldn't work. Never believe anyone who tells you otherwise.
posted by Houstonian at 1:04 PM on May 20 [1 favorite]


This article (which Barry Ritholz linked to yesterday) might be interesting to you:

Why A 66% Crash Would Be Better than a 200% Melt-up

You could consider a momentum strategy, if you're not willing to stick it out. Read up on Mebane Faber and/or Cliff Asness, two people who are big proponents of momentum-based strategies. Momentum is a very well-researched market phenomenon. In a momentum-based strategy, you might not necessarily outperform the market in any given year, but volatility and drawdowns are supposed to be less, so that, especially on a long-term basis, your overall return would be better -- as long as you stick to the strategy.

Notice that the common theme here is not to let emotions get the best of you!
posted by odin53 at 1:34 PM on May 20 [1 favorite]


There is a lot of solid advice here, and I even learned about a fund I'd never heard of (Target Retirement Fund). It is true, if I'm asking the question then my investment strategy is too aggressive for my risk tolerance, so I'm going to diversify a bit to make myself feel like I'm doing something. Then I'm just going to forget it and continue to add money and adhere to the 'stay the course' strategy. Well, first I need to nail down that pesky job of course. Luckily I do have a hedge against the collapse in the form of 5 acres of open field. Unfortunately, it's near enough to the coast that the impending rise of the seas will swallow it whole. Then again, that will likely be the problem of any future heirs and not mine.

The biggest takeaway from this is that I need to make a visit to my financial planner and have him help guide me along in accordance with my risk tolerance. Thanks for the input and the quality links. It did a lot to balance out the rhetoric spewed by the talking heads.
posted by MajorDilemma at 2:10 PM on May 20


As far as "staying the course" goes, another popular rule of thumb is for your portfolio to have the same percentage of bonds as you have years under your belt. So if you're 38, you'd have 38% bonds, 62% stocks, and use that as a guideline for rebalancing every year. (I personally do years-10 based on the idea that we're living longer.)
posted by rouftop at 4:22 PM on May 20


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