Protecting My Investments From Stock Crashes
Protecting My Investments From Stock Crashes: Avoiding Retirement Disasters
Retirement Planning Is Not Rocket Science…
The key to proper retirement planning involves only a couple of techniques that change over time.
How Much Money Should You Have in Reserve/Saved at Retirement?
· Unless your retirement income is a pension or directed payments that pay you every month, without reducing your savings or assets, you will need 40 times your annual income to retire.
· If you are drawing income of $3500 a month from your Ira’s, 401k’s and stocks, you will need $1,680,000 in reserve to retire comfortably.
· If you earn social security and have or a directed pension plan that pays you monthly, you only need 24 months in reserve for emergencies.
The Standard Investment Portfolio, called the “Bucket.” The Basics of Planning.
Regardless of who you choose to work with, most investment houses will put you into a mutual fund or into a combination of funds that are divided up in 3 ways:
40% Growth: invested into Fortune 500 companies, known as small cap or large
cap companies. This is the riskiest part of the portfolio and usually takes the
biggest hit in a crash.
30% Medium Risk: Utility bonds, convertible bonds, REIT’s, mortgage-backed bonds
30% Low risk: Non risk bonds, government bonds, CD’s, past due tax, fixed returns.
Buying and Holding, NOT!
Most brokerages houses and retirement advisors have a buy and hold mentality. Buying and holding means that you rarely change your investments and if the market takes a hit, even if the hit is 50% or more, your advisor tells you to HITRIO: “hang in there, ride it out,” a very poor strategy. Instead, a much better plan is to estimate a market crash and move those assets to a fixed return before it happens. You will certainly earn less money and if the predictions are not right, your returns will be minimally affected, but if one in three times, you are correct, and you move to cash with a fixed return, you will be greatly rewarded and not lose 20 to 50% of your portfolio. Most will tell you that you can’t predict a market crash. I have predicted them several times within a couple of months to one year. If you ever want to call me and ask, I would tell you my opinion.
Market crashes happen when the market has a huge gain over several years and is oversold. If this is the case, it is better to move out of the market, even for 6 months.
Even if you only get 2% returns while in bonds of cash, that is better than losing up to 40% of your portfolio. When the economy begins to change, cools or we see negative GDP growth, this is the time to move to a fixed return until something changes. This will have no affect on your investment amounts or strategy.
There are 2 Types of Retirees: One who is still investing and one who is now has stopped investing.
1. Still Investing: This means generally, that you are still working and still contributing to your retirement plan, or not working but less than 70 years old and still investing. This could greatly change your strategy depending on what you have invested and how many more years you are going to contribute. And you a generally investing into the Standard Investment portfolio listed above.
401ks or IRA’s, Your Most Important Vehicles for Retirement
If you are preparing for retirement, the most important vehicle you should set up first is a tax deferred 401K or IRA through your work (*you can also set one up if you are self-employed through Sure Payroll). A big advantage of a 401k is that you can borrow 50% of it without paying taxes on it, even though it is a tax deferred vehicle, so it is very liquid.
For example, most people still investing contribute monthly to their 401Ks or IRAs. This is the most profitable and risk adverse way to invest. Here is why, 401k and IRA investments/contributions are tax write offs every year you invest up to $20,500 a tax deferred, and $26,000 a year if you are over 50.
Dollar Cost Averaging
Dollar cost averaging means that your are investing the same amount every month from your paycheck or checking account in a basket of investments or into the standard portfolio mentioned above. What that means is that you are buying the investments at the price they are worth that month. If the price goes up or down, then you are getting it for that price for that month. This strategy greatly reduces losses because you’re your purchases are averaged over the year greatly hedging against buying too high. This doe not mean you should not pull out when you suspect a crash because as your portfolio gets bigger, the less dollar cost averaging will help in a big crash unless you get out first.
Paying principle on Your Mortgage as a Retirement Strategy: BAD STRATEGY
Unless you can pay your mortgage off at retirement this is very poor use of your money and is actually risky and you pay more in taxes. The money you put into your house is a dead investment. It certainly saves on interest, but most Americans refinanced at 3% or lower in the last economy and certainly can out invest those returns over time. If you can’t earn more than 3%, you should fire your investment counselor. You are robbing your investment portfolio if you use this strategy. Your house is going to appreciate regardless of the mortgage payments you make. Maximizing your 401K and IRA’s, instead of paying your mortgage, actually turns payments into write-offs that delay taxes on those investments until retirement. The return absolutely outruns paying down a 3% interest rate.
Liquidity
Liquidity is a very important part of your portfolio. Liquidity means you can get to your money without heavy expenses or losing any money. Many retirees don’t have any liquidity because they have to all their money invested in order to survive. 401ks and IRAs have incredible liquidity. One can borrow up to $50,000 in a 401k instantly and receive the money having only to pay a low interest payment against the loan over time. If you are invested directly in stocks, you can borrow at margin, but you will not be able to this if your stacks are part of a mutual fund. The only way out of that is to sell. Getting equity out of your home can be expensive and costly unless you take a reverse mortgage which can greatly enhance your liquidity and disposable income if you can’t afford to live on your present income.
2. 2nd Type of Investor: Not Investing: If you are no longer investing, then you are now trying to preserve your investment portfolio and not subject it to risk. It is not very important to get savvy to when markets could crash since your at the height of your investment and dollar cost averaging will not protect you as well. Remember, most portfolios are 40% invested in stocks, so the chances of you losing lots of money is pretty good you maintain a buy and hold mentality. In most cases, your investment counselor will want move your portfolio out of stocks and into fixed rate products and or conservatives bonds when you stop investing. The problem with this is that the low investment rate may not preserve your investments and you may survive their demise. In these cases, then only using your home equity in very prudent ways can help you survive if you have to live off your portfolio after our retire. If this is you, please ask for the Complete Guide to Reverse Mortgages. If this is not you, congratulations, you are one of the very few who will not need additional strategies at retirement.
Disclaimer: Ralph Migliozzi is not a financial planner or licensed to advise people for investments. He has viewed hundreds and hundreds of tax returns, and successful retirement portfolios, over his 35 year career as a professional mortgage lender and has gleaned the above strategy from it. He has also seen how UNFLEXIBLE Buy and hold strategies have ruined portfolios. You should seek out professional advice, including a financial planner before following any strategies recommended on-line or in a blog. This writer does not recommend any specific financial investment products, but he does recommend vehicles (an IRA or a 401k is a vehicle). The above is simply an opinion based upon personal and professional experience.
Ralph Migliozzi
Broker Originator
Serving Northern California
NMLS 282851 DRE #01002038
(p) 530-330-3073
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