By Dennis Kagel, Chartered Financial Consultant
There are actions we can take to protect our physical health and there are actions we can take to help protect our financial health. A recent survey revealed that only 1 in 6 people ever make any changes to the investments in their 401(k). This lack of action can be a recipe for failure!
Prepare Yourself For The Next Market Crash
Many investors are wondering when the market is going to begin its correction (move downward). This is not surprising given the fact that the Dow Jones has gained well over 11,000+ points since the March 9, 2009 close of 6,547. The market will not continue to go up and up forever. In parts of the world (Southern California, for example) people know that earthquakes are inevitable. As a result, earthquake preparation kits are a fixture in many households. Given the fact that market crashes, like earthquakes, are part of life, how should you prepare for the next one?
1. Make certain you have balance in your retirement accounts between “risk “ money and money that is more secure.
Regular followers of my columns will recall that we base our investment model around the concept of Yellow Money, Green Money, and Red Money. A quick review:
- Yellow $: Checking, savings accounts, money markets, credit union accounts, etc. These are primarily liquid and “FDIC” accounts holding money we are going to use in the next 6 –18 months.
- Green $: An investment must possess three qualities to fit in this category (principal guaranteed, allows you to retain your gains, and guarantees a future income for life).
- Red $: Money at risk (stocks, mutual funds, ETF’s, bonds, etc.). Most brokers use bonds for safety and income. I disagree. Ask anyone who owned Lehman Bros. and/or Enron bonds if they consider bonds “safe.” In our model, bonds belong in the risk category (Red $) due to the fact that there is a risk with the issuing authority and bonds are subject to interest rate risk. As interest rates rise, bond prices fall. We are beginning to see this now.
2. Reduce the level of risk of your investable assets now.
This sounds obvious and simple, but as evidenced by the fact that the majority of people don’t make any adjustments to their 401(k) plans, there are many people who don’t ever adjust the risk level of their total portfolio. Even if people do make adjustments, they usually get it wrong by moving into investments that they believe to be safe; when in actuality, they are not protected from risk. A common example of this is when individuals move into bonds or bond mutual funds believing this money is safe and protected from loss when it is in reality exposed to risk. Admittedly, there are varying degrees of risk. However, if the majority (or all) of your investable assets are in stocks, bonds, and mutual funds, you’re still at risk!
3. You must take longevity risk off the table!
Even if you don’t share the anxiety of investors waiting for a market correction, this is a good time to reduce the risk level of your retirement accounts. One way of doing this is to sell a portion of your stocks, mutual funds, ETF’s, bonds, etc. and transfer that money into immediate or deferred fixed-income annuities. Fixed-income annuities can be purchased beginning 20-plus years prior to, as well as through the early stages of retirement. In addition to elimination of market risk exposure, fixed-income annuities are designed to generate a sustainable lifetime income stream. Without income planning, you run the risk that your money will run out before you do.
It’s easy to get complacent and forget about the fact that a downturn is inevitable when you see the market hitting new highs. While it’s not advisable to attempt to time the market, it’s prudent to utilize time-tested, conservative strategies that will keep you on track for pursuing your retirement income planning goals.
Please give Dennis Kagel a call today at 309-454-9171 to schedule a no-cost and no-obligation visit. Would it be worth taking 30 minutes of your time to find out if you’re on track to reach your financial goals?
All attempts have been made to verify the information presented in this article and it is believed to be accurate. Fixed index annuities are insurance products that I’m licensed to represent. Any liquidation of securities in order to transfer funds to an FIA will need to be conducted by you or another party. An accepted measure of safety is the financial stability and condition of the individual insurance company issuing the plan. Some of the strategies discussed have potential income tax consequences. Please consult your tax or legal advisor for specifics.
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