Would it be wise to transfer my 401k to bonds or cash equivalents?
November 6, 2013 6:52 AM   Subscribe

Looking at the market, currently, I have the same sense of foreboding I had in late 2007. If I am operating under the assumption the Dow and other stocks are going to start tumbling over the next 1-2 years, what actions should I be taking to protect my 401k?

I'm getting to the age where my 401k is becoming more and more important to my family's future, and I really don't want to lose too much ground if the market were to take another precipitous dip. I'm pleased with my growth over the last three years (15.4%!) and have gradually increased my contributions.

However, with the rate of the Dow's growth, my fear of China experiencing a huge dip in market performance (many of my funds have investments in Asia), and my research into some growing bubbles in various sectors, I truly fear we're going to see another market "adjustment" over the next couple years. I don't mind sacrificing a chunk of growth if it's going to protect me from losing a large amount of money. If I were to only see 1% over the next few months in a manner that sacrifices some additional gains while preventing me from losing a lot more later on, I'm ok with it. Should I be moving my money into short term bonds, long term bonds, cash equivalents, or something else?

I'd love if Mutant were to weigh in on this, but if other people have some insight and tips they'd be greatly appreciated.
posted by Bathtub Bobsled to Work & Money (28 answers total) 5 users marked this as a favorite
"Bonds" is a broad category. Yields on Treasuries are so low that you will lose money to inflation by holding them. Yields on many corporates are somewhat higher, but not much, and you still face the prospect of losing some value to inflation. Yields on junk tend to be higher, but their prices have been bid up recently because people are chasing yield.

Yields on preferred shares have likewise declined in recent months as more people are seeking yield.

So, you would not be the only person concerned about the stock market.

Frankly, I would sit tight but then I tend to be less risk averse than average and do not try to time the market.

Holding assets in cash or cash equivalents is generally a bad idea because, again, you lose value to inflation over time.
posted by dfriedman at 6:55 AM on November 6, 2013

You should not sell when the market goes low, you should buy! If the age in your profile is correct, you have plenty of time for your portfolio to rebound before you retire (assuming that's all you're using your 401(k) for; if you have other more immediate goals, my advice might change).
posted by ThePinkSuperhero at 7:00 AM on November 6, 2013 [3 favorites]

Your profile says you're 33 years old - is that right? If it is, and you're planning to use the money at retirement as intended, you're worrying way too early - any correction within the next few years is likely to be but a blip in the 30 year scheme of things. If you need the money earlier, the advice might change, but I'd also then question why you're investing money you need sooner than retirement in a retirement account.

Edit: What ThePinkSuperhero said.
posted by UncleBoomee at 7:03 AM on November 6, 2013 [1 favorite]

Your profile says you are 33 years old. You presumably have 30-odd years before your retire, and then another 30-odd years to live on your retirement savings. In the long run, it is essentially impossible to time the market, because people a lot smarter than you are timing the market at the microsecond level. "Forebodings" are not a good basis for making massive shifts in your investment mix. Pick a mix that reflects your risk tolerance, and stick with it. Adjust the mix incrementally and only every 10-15 years as you move through life and your risk tolerance changes, but keep in mind you are investing for the next 60+ years.
posted by beagle at 7:06 AM on November 6, 2013 [2 favorites]

It depends on what kind of economic circumstances surround the potential stock market crash. If the whole economy is freefalling, then cash equivalents might not be a great idea, since cash will be dropping too.

If that's the case, what you want to do is look into something like a capital preservation fund. They actively manage the fund so as to try and maintain value in a dropping market. Rather than passively ride the economy down in cash, or try to *make* money, they attempt to stem the losses and lose less value than anyone else. If everyone is losing 10% a year and you only lose 5%, that's a gain.

However, if it is just a business cycle stock downturn, you'd probably be better off leaving the money in a couple of funds that you trust. The people doing it every day are going to be better at timing the market than you are. (Or else you'd already be trading raw stocks on your own.)

My anecdotal evidence is that I used the "let it ride" strategy when the economy tanked in 2008/2009. I lost nearly half the book value of my account in 2008. I was back to even by the end of 2009, and it has more than doubled since then.

(When I look at my returns over that period, by the time I saw the sign that the market had topped, I had already lost a ton of money. And by the time I knew the market had bottomed and would have bought back in, I would have missed out on a quarter with 18% gains. Meaning, I feel like I had a pretty good handle on timing the market. But my fund managers had an even better grasp on it.)

The only way to time the market successfully is to be the guy who everyone calls crazy. You have to sell *before* you see the market top out, and start buying before you see it bottom. Very few people have this kind of vision and even fewer are right more than they are wrong.
posted by gjc at 7:24 AM on November 6, 2013 [3 favorites]

If you're 60 or older, that sounds fine. Otherwise just leave it. The market will be fine in the long term. I don't see any reason for it to dive in the short term. If you're concerned about China you can move more of your stuff to US blue chips or index funds.
posted by Slinga at 7:25 AM on November 6, 2013

Everyone above is correct. You have no way of knowing what the market will do going forward. Neither does anyone else. People who invest via market timing only win via luck. People who invest over long periods of time and stick it out, constantly buying more assets regardless of the market price succeed. There is no 40 year time window in the history of the stock market in which this is not true.

If you get out now, you encounter a few big problems.
1) What will you do if you guess wrong. Do not underestimate how hard it is to get back in if you have guessed wrong. A common problem. In fact, a lot of people amassed cash based on their guess about a dip starting this year. Those people may still be sitting on the sidelines now, as the dip never came and the market had one of it's biggest runs ever.
2) You will automatically lose to inflation.
3) BTW, if your current 401k is in stocks exclusively, and it has only gone up 15% in 3 years you should see if there are other investment alternatives within your 401k investment universe. They S&P Index has gone up 50% (if you net in dividends) during that time frame.

You have one thing only in your favor, and that is time. If you start trying to time the market you essentially kill off the one investing edge you have. I KNOW it is painful to watch your portfolio fluctuate, but it is imperative that as a small investor you exploit the edges you have. In this case, your big edge is time. Just keep buying in and let time be your friend.
posted by jcworth at 7:29 AM on November 6, 2013 [1 favorite]

Response by poster: Thank You for the replies. To answer a few questions:

1) Yes, I'm 33.
2) I do have a very large sum in the 401k, which is one of the reasons is so painful to watch the fluctuations. For some, a 1% loss may not be a big deal, but from my point of view, I just watched over $2K disappear. I guess I'm to much of a penny pincher to handle what seems natural to others. To me, a few thousand is several months of groceries.
3) My focus is not so much to time the market, but to keep my money. I realize there are "experts" with their hands on all of the important buttons working on all of my funds, but in 2008, I watched helplessly as those experts lost almost half of my money to a financial train wreck I and many others saw coming for months. Forgive me for doubting their acuity.
posted by Bathtub Bobsled at 7:40 AM on November 6, 2013

Bathtub Bobsled: "2) I do have a very large sum in the 401k, which is one of the reasons is so painful to watch the fluctuations. For some, a 1% loss may not be a big deal, but from my point of view, I just watched over $2K disappear. I guess I'm to much of a penny pincher to handle what seems natural to others. To me, a few thousand is several months of groceries.

You should be checking your 401k sums yearly. Not daily.
posted by Grither at 7:48 AM on November 6, 2013 [11 favorites]

Response by poster: You should be checking your 401k sums yearly. Not daily.

My advisor has told me something similar a number of times. It's hard, though. It's a lot of money representing years of hard work, and the years I will (hopefully) not have to.

Thank you, everyone, for the advice. I'll do my best to keep it all in mind.
posted by Bathtub Bobsled at 7:52 AM on November 6, 2013

but in 2008, I watched helplessly as those experts lost almost half of my money to a financial train wreck I and many others saw coming for months. Forgive me for doubting their acuity.

Fund managers are not trying to keep you from losing money, they're trying to achieve the fund objectives outlined in the fund prospectus. Often, these objectives involve tracking the performance of a stock market index or a certain segment/county. It is not possible to achieve any meaningful objective in a way that has no risk of losing money.

You should look at this through the lens of a risk/return tradeoff. Over 30 years, it is very, very likely that stocks will outperform bonds. In the next year, who knows? Bonds certainly will not lose half their value, whereas stocks might, as they did in 2008. Someone who is very risk averse would be quite right to put all funds into bonds. You should resist the temptation to be that person, as with your implied time horizon, the relative risk of stocks is considerably lower.

PS- It sounds like you are sending money either financial advisors or actively-managed mutual funds. Seriously, look into not doing this, that is a near-certain way to increase your returns at the cost of a little bit of hassle on your part.
posted by deadweightloss at 7:57 AM on November 6, 2013

Bathtub Bobsled: "My advisor has told me something similar a number of times. It's hard, though."

Hah, I know! I've been meaning to hide my 401k from my mint account (which I check daily, to make sure there's nothing funny going on with my checking or credit card accounts) for a long time. Still haven't done it.

I think I've just changed my view of that money from "Oh man, I could've bought a new PC for what I just lost yesterday!" to "Huh, looks like the market was up/down a little yesterday."
posted by Grither at 8:00 AM on November 6, 2013

I agree with others about the difficulties of market timing and strongly caution you about selling just because the market is up. However, being self-aware of your risk tolerance is a huge deal and if the volatility on your investments is above your comfort level, you should either work on increasing your comfort or reduce your risk.

To increase your level of comfort with volatility, the idea of not looking at short-term fluctuations of long-term investments is a good one. Humans have a natural loss-aversion response, where losses are more painful than gains and if your portfolio is up $5,000 one day, you'll feel "hey, that's not bad" but if it then goes down by $5,000 next date, it can feel like a crushing defeat whereas in reality, the two movements just canceled each other out. Perhaps you can read up on behavioral investing to better manage your reactions and emotional state.

In parallel to that, however, you should adjust your risk to be in line with your risk tolerance. If you're concerned about 1% moves now, how would you react if the market had a flash-crash or black-friday type event and lost 10, 20% in a day? Or if we had a 2007-2009 level period of continuous market decline, with commentators saying how the end was near and your portfolio dwindling every day? If you suspect that your reaction would probably be a visceral 'I can't take the pain and must sell,' you should probably reduce your risk level now. Otherwise, you'll just sell at the worst time possible, make even less and will be uncomfortable the whole way.

PS: If you do have 'experts with their hands on all of the important buttons working on all of my funds' you may want to reconsider that. If possible, put your portfolio into a mix of a small number of index funds instead of expensive, high-activity funds.
posted by bsdfish at 8:44 AM on November 6, 2013

You cannot time the market on a daily basis. Even the very best investors with year on year of stellar returns have individual down days. If you watch the value of a stock portfolio on a daily basis you will go mad. "What if I had sold then? What if I had bought in last week?" you'll ask yourself, over and over again. It's pointless: even the professionals cannot consistently time the market on a day to day basis, so why expect yourself to be able to do so?

In the short term, the market is a random walk. In the long term, it's a store of value. That long term value may fluctuate, but you're not going to be able to discern any real underlying changes by focusing on daily valuations. Stay focused on the long term.
posted by pharm at 8:49 AM on November 6, 2013

Response by poster: PS- It sounds like you are sending money either financial advisors or actively-managed mutual funds. Seriously, look into not doing this, that is a near-certain way to increase your returns at the cost of a little bit of hassle on your part.

What my company offers is a 401k system that allows me to move my holdings between 19 different funds of various equity percentages, sectors, and there are several bond investments offered. I also can change where my contributions go on the next paycheck(s).

So when I talk about the people with their hands on the buttons, I'm referring to the people who work for the mutual funds I've invested in. The financial advisor is one provided to my company's employees. We are expected to meet with them at least once every two quarters, and we can schedule time with them up to once a month (unless there has been a qualifying major life event, in which case, I can meet with them whenever and as much as I want until it's been addressed). They don't touch my money unless it involves the purchase of company stock. I'm not paying anyone to manage my 401k, that's up to me.

Also, The way it works with transferring the money between funds/bonds/investments, I can, at any point, transfer my investment to other funds at any time, and only have to pay a $2-$5 fee (depending on the fund). The only stipulations are certain funds do not allow me to move the money back into the account within a certain time frame, and the time frame is longer if I totally liquidate my holdings (I think the T.Rowe fund I saw won't let me do additional contributions or move money back into it within 6 months of a partial and 1 year of a liquidation, but I'll have to check that PDF).
posted by Bathtub Bobsled at 8:59 AM on November 6, 2013

I just watched over $2K disappear

Is your employer contributing to your 401K? Think about it this way: that $2K is probably much less than the cumulative gains you mentioned you had over the last few years. Plus, you could think of it as just being the money your employer put in. Or just the gains on the money your employer put in. Figure out how much money you actually contributed out of your paycheck, and deduct from that the tax savings you got by making those contributions. That's the only real money you put in, and chances are you will never see the account dip below that — you would have to lose all your employer contributions and all your gains for that to happen. So, relax. What goes up must come down once in a while, and vice versa. You will not always gain every day, week, month, quarter, or year.

Also, in reality, $2K did not disappear. Your account consists of securities, and the number of stocks and bonds you own did not go down. What disappeared is some of the value of those individual holdings. (Others actually went up, by the way, within the mix.) As long as you maintain the same holdings, you preserve the ability for the account to regain its value. But if you move out of stocks and into cash, that's won't happen. So just sit tight.
posted by beagle at 9:26 AM on November 6, 2013 [2 favorites]

I have come within a percentage point of your rate of return over the last three years by throwing all of my money in an index fund and then walking away.

Take the energy you are using on watching your money that is already invested and instead apply it to either increasing your income or increasing your budget efficiency. These will have a much better return for you than obsessing over your retirement account.
posted by skrozidile at 9:31 AM on November 6, 2013

Seems like you're getting a lot of good advice in this thread. Losing $2000 in a portfolio will always feel bad. Always. But remember: if you take your money and convert it all to cash, you are giving up all the future gains you might have gotten. Inflation averages about 3% per year, and the market goes up on average over 3% per year.

If volatility is truly scary to you, you could consider a more conservative portfolio allocation (although that too will go both up and down), but at your age I would not do that (assuming you 401k is only for retirement). Remember to also have outside non-retirement savings.
posted by Phredward at 9:44 AM on November 6, 2013

My focus is not so much to time the market, but to keep my money.

You can do that easily at the expense of getting a respectable return. Just buy into cash equivalents, but you will most likely be worse off for it.

Having a sizable portfolio is fun when the market trends upward. You check your balance and find that you made money while you were sleeping and it gets really exciting when the growth exceeds your contributions. You have a money machine working for you! And then... it goes to pot with a bad year and two years of gains are demolished in two months. It is unreal, but that is how the game works.

For a person in his or her 30s the consensus is to accept the volatility. Time is on your side. Time in the market is a much better predictor of finishing well than timing the market.
posted by dgran at 10:53 AM on November 6, 2013

ask your advisor if put options to hedge against dips are right for you.
posted by bruce at 10:54 AM on November 6, 2013

Read these two articles from the NY Times this week and make your decision:

The Dangers of a Stock Market Melt-Up

Dismiss Diversification at Your Own Risk
posted by Dansaman at 11:12 AM on November 6, 2013

Seconding everyone who's said "DO NOT MESS WITH THAT CASH, HOMBRE". I also have a large chunk o' change in my 401 - I've been investing 7% of my pay for a decade, in the ONE smart financial move I've ever made - and I know the temptation. Believe me, I KNOW. I lost about 28% in 2008 and it was excruciating. But pretty-please, with sugar on top: get it allocated right, ONE TIME, with the help of the company managing your portfolio (they should have an 800 number), then resist the urge to mess with it. You're playing the long game, and any attempt to mess with your funds is to try to avoid this reality.

If you MUST change something, change the amount you contribute, by upping it a few points. That, more than anything, will DEFINITELY pay off.
posted by julthumbscrew at 12:12 PM on November 6, 2013

I just watched over $2K disappear
This is a dangerous line of thinking. Let me put it this way: Do you own a house?

Well, do you look up its value every day? Do you bemoan the money that "disappears" when it fluctuates down? Celebrate when it fluctuates up? Read construction industry rags so you know where the housing market is going? Fret when you pick up bad vibes, to the extent that you consider selling your house in exchange for a fleet of six-year-old vans (which, you have been assured, are a stable store of value)?

I'm going to guess no. At least, not unless you're planning to sell your house anyway in the very near future. So why do you do these things with your 401(k)? You shouldn't care about its present value unless you're about to sell it anyway. And chances are you won't see a single dime out of that thing for at least thirty years. You should only care about what value it will have thirty years from now. If you truly believe that the stock market is going to dip so bad that it won't recover, even after thirty years, then by all means take your money out. Otherwise you are just panicking over a pretty much imaginary number.
posted by aw_yiss at 1:28 PM on November 6, 2013 [1 favorite]

MoonOrb: Go to www.bogleheads.org and read the wiki on "getting started." You are doing a lot of things right but are in danger of making some terrible behavioral mistakes.

I want to specifically second this - or get the Bogleheads book and read it. In your situation, I'd recommend the most passive, lowest fee, market index matching investment choice in your retirement account that you can get your hands on. In the long term, a 1% fee that eats away at your compound earnings is going to do a LOT more damage than routine market volatility.

Girther: You should be checking your 401k sums yearly. Not daily.

Yeah, I'd say it's ok to look every 3 months, but definitely not daily. Especially if they will sit there for years - decades, even.

Again, get the most passive, lowest fee investment choice you can get into. It's been shown over and over and over again that those outperform actively managed funds in the long term, even if they don't do as well on a monthly basis.

For example, you're pleased with growth over the last three years (15.4%!). And that's not bad at all. But the Vanguard Total Stock Market Index fund (VTI) is up 45.63% in the last 3 years. Even picking a high point in the past (July 2011), it is up 32%. And it has an expense ratio of 0.05% (not a typo).

Seriously, reconsider actively managed funds.
posted by RedOrGreen at 2:15 PM on November 6, 2013

A couple of things really stood out to me here:
"I just watched over $2K dissapear"
If you learn to just breathe (deeply...ommmmmm), and let the dividend reinvestment and your contributions buy more shares in down times, you'll be fine in the long run.
That's what 401K's are about - the long run. Not 2k in three weeks, more like dollar cost averaging over a decade.

The other:
"..and have gradually increased my contributions"
Yay!! that's exactly what you should be doing.
Seriously, at 33 you have over 25 years of investing (and compounding interest) before you'll need these funds. Think truly long term, and find some low-cost funds in the portfolio offered by your company, and start moving chunks of money into them.

My own style runs to 'value' investments. Which is to say that any fund with more than a 20% turnover (they sell more than a fifth of their portfolio in a year) doesn't get my vote. Because they'd be trying to do what you're trying to do - time the market.
You claim you don't want to time the market, but you don't want to lose money - can't have it both ways.

Reassure yourself by looking at Apple stock price over the decades - in Feb 2000, it was $28/share, in December of 2000, it was $7.44/share! If you owned 100 shares at that time, you'd have seen $2056 dollars 'disappear'. BUT, if you hung on to just those shares (I'm too lazy to figure out dividend re-investment, and the additional shares you'd gain there, plus the Miracle of Compounding Interest), and nothing else, they would be worth: $522.45/share now. So the $2000 turns into half a million in 13 years! Whereas if you'd sold on the down side, you'd be out that $2k, and the half-mill.

Yes, this is an extreme example, but read up on these things, and stop thinking short term. Keep investing regularly, accept some risk (less as you get older), and you'll be fine!
posted by dbmcd at 4:48 PM on November 6, 2013

One more voice saying to hold tight. In your investment horizon, $2,000 up or down is nothing.

Trying to time the market, especially when motivated by fear, is almost a guarantee that you will be that classic bad investor who, despite all best intentions, buys high and sells low.

Like many others, I rode the market down and didn't lose sleep, because I knew that all my contributions were buying many more shares accross my allocations than when the market was doing better. And when the market turned around, my portfolio value came roaring back and then some.

For a very rough rule of thumb, the percentage of bonds in your portfolio should be your age. If you're 33, then 67% of your portfolio, give or take, should be in stocks. Less than that, and you are sacrificing growth over your 30+ year investing horizon.

In other words, if your allocations are right for you during an up cycle, they are still right for you in a down cycle.

Something you might try: take a look at a 30 year graph of the Dow Jones Industrial Average, then find some spikes and dips on it and look up what was happening at those times. Which is just to suggest that, By the time you retire, the dip you're so worried about today won't even register on the 30-year graph.
posted by Short Attention Sp at 5:59 AM on November 7, 2013

If you're a 30-something (like me!), you have lots of time to make a return AND recover from any swings in the market before retirement.

(I am not your Financial Planner, and all that...)

I wanted to mention Target Date Funds, because I've been using them in my own retirement planning. Your best defense against market swings is to 1. keep your money in the market(!) and 2. keep an eye on your asset allocation. It is the Stock/Bond mix that gives you a tradeoff between risk and return - risk makes you money, but as you get closer to retirement, the less time you have to recover from a drop.

If you were ready to retire in 2008, and you still had stocks, you were screwed, because you had to sell before the market could recover. If you has slowly converted those stocks to bonds in before 2008, then you would have been slowly exiting volitile stocks for more boring, more stable bonds.

This is the basic idea behind Target Date Funds* - they do this rebalancing automatically. Yes, it's a little bit of active management, but a place like T. Rowe Price (example for a 2050 retirement date: TRRMX) or Vanguard (VFIFX) can do it for cheap (i.e., a small Expense Ratio).

*For more explanation of this concept, you can read this flyer. The "Thrift Savings Plan" (TSP) is the Federal Government's version of a 401(k). These "Lifecycle Funds" are the TSP's version of Target Date Funds. (I've been a federal employee for 12 years now, and I've been pretty happy with it.)
posted by jason6 at 7:43 AM on November 7, 2013

One other note that you may find comforting. I believe Bill Gates was the first person to ever lose a BILLION dollars of value in the stock market in one day. Something along the lines of 3.5 billion to 2.5 billion, along those lines. He was asked what it felt like to lose a billion in a day, and he pointed out that he had lost nothing, as he did not sell. That +- 3.0 billion is now worth 60 billion or so.... Good lesson for all of us, if he sold he would have let 20 billion in future worth go... Stick to your plan, and let time be your friend. It is pretty much the only ally the small investor really has.
posted by jcworth at 3:34 PM on November 15, 2013

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