Should I Cash In My 401K Now?
Written on 09/25/08
A friend writes.....
Should I keep my 401k in stocks or start moving some of it into bonds? My inclination is to sit tight and buy shares at a lower price, since I have 20 years before I legitimately retire.
Enjoying your posts. You should start a blog with an rss feed. I would subscribe.
My response......
Glad you are enjoying my commentaries. I really just started doing this for friends and family members that I thought might enjoy some "conversation" on real world events from someone they know.
I've recently thought about making this into a blog, but haven't really researched it. I'm sure there are all types of strategies on this, perhaps we could get together sometime discuss this idea.
On a 401k I'm sure you know the first rule is to not take it out for a period of time that would cause you to pay penalties and taxes. The next question would be on how quickly you could pull the money out of the market as things are happening quickly. I would think you need to do it immediately if you are going to exit the market.
The market is in a severe downturn and if you look at a long term chart of the NASDAQ it has recently broke to new lows after some lower peaks over the last few months. It has broken an uptrend line that goes back at least 4 years.
Once this type of uptrend line is broken you have to assume the market is headed down until it proves otherwise. Of course even in bear markets you have some sharp rallies, but they don't last long and don't mean much.
Here is the real question which nobody can answer for sure, but let's discuss. Are we just in a normal downturn in the market and economy or will this thing get really ugly this time? You see, the President of the United States was just on the TV tonight essentially telling you we are looking out over a financial cliff and asking for a deal so we won't fall off the edge (he hopes).
If this turns out to be just a normal downturn that is reasonably short lived then looking 20 years down the road the strategy is normally to keep dollar cost averaging in and ride it out as it is always difficult to know exactly when the bottom has been reached until a lot of the gains on the next leg have already been made. But my thinking is your investment money should normally be diversified with some in stocks, bonds, gold, and real estate.
Here is the problem. If our financial system freezes up it will be hard to find a place to hide. T-Bills are a possibility, but you will receive little or no interest on your money if you take this route. If you have quite a bit of money you could spread it among different banks (100K max for FDIC insurance), but I'm not sure if you could break up your 401K that way.
Should this thing turn really ugly then I'm sure the market will take a terrible beating. But consider this on bonds. Our dollar will likely plunge as well and interest rates could spike if investors, domestic and foreign, lose faith in our system and want junk bond rates to buy our debt. If that occurs then you will likely take a beating on bonds as well.
Last week it is my understanding people wanted to raid their money market accounts and this is what nearly led to a disaster, so be careful about putting money in a money market.
If the dollar plunges then gold would most likely be the best place to be, but keep in mind it is back up toward its high now which is over triple the low just a few years ago. It certainly could go higher but given this big run I wouldn't put all my eggs in this one basket.
Let me try to illustrate how that normal investment ideas are not necessarily going to work if we are headed for a financial and economic meltdown.... some of which has already occurred.
Suppose in January 2008 you had just retired and had one million dollars that you had worked 40 years to save and needed for your retirement. You wanted the money to be safe so you only wanted to invest in some of the largest and oldest companies in America.
You decided to invest in a couple of the large investment banks, one of which had been in business since before the civil war. You also thought a couple of the largest companies that handle real estate loans would be a secure investment too.
And to add more diversification you picked the largest insurance company in the world with all kinds of diverse operations in 130 countries. Let's see how you did.
January 1, 2008 you bought $200,000 worth of shares in each of these 5 old and very large companies.
Lehman
Bear Stearns
Fannie Mae
Freddie Mac
AIG
If you had done this as I have shown most would have believed you put your money in safe companies that would have a zero chance of going bankrupt this year. Yet that is basically what happened to all 5 of them.
In short, your one million dollar investment in these 5 companies is practically worthless after only a few months time. This is the type of action you get in a very unstable stock market.
I don't want to be an alarmist on this and maybe they will agree on a package and things will not be so bad. But I'm afraid there are some structural problems that this bailout package won't solve.
So consider these things.....
The Kondratieff Wave predicts a depression is coming and if you read that article closely, which must have been written in late 2001 or early 2002, most of what it said was going to occur did occur. Certainly we have a mountain of debt and that is what the theory says always leads to a depression every 2 or 3 generations.
The question always is, is this time different? It says yes, everytime has differences, but the debt problem always leads to the same result.
If Obama gets in and raises capital gains taxes and taxes on the "rich" during a weak economy I do believe we are in for a hard crash. As you know I think he has a low probablility of winning, but it is certainly still possible as anything could happen in the next 6 weeks that would totally change the outcome of the election.
Our energy situation is one of the keys. As long as we have energy we can work our way out of a bind even if it takes a while. But if our energy supplies are restricted then this could cause lots of problems in itself. This could happen in a variety of ways. It looks like Iran is going to have to be dealt with sooner or later unless they get new leadership. This could lead to an oil supply shock if things get truly ugly over their nuclear program.
Here is a link on our gasoline supplies:
And of course Al Gore always wants to be helpful when it comes to energy...
On the bright side I think we will have some technology breakthroughs in the near future both in transportation and in the production of electricity through nanotechnology in solar panels. But this will probably still be at least a few years from now so in the meantime it is not a solution.
Bottom Line: As I said in my commentary in March, we are in for some rough financial times and if you have money you need to diversify it as much as possible to try and ride out the storm without getting wiped out in a particular investment. As you see from the example above, if you had all your money in the market, in what would seem to be 5 conservative stocks on January 1, 2008, all the money you had invested would now be gone.
So, don't assume any company will survive this storm because we have no way to know which ones will and which ones won't.
Don't assume traditional vehicles such as money market accounts are safe at this time.
Assume real estate values will be trending down for a while. If you have enough money to pay off a house you plan to live in for an extended period of time and still have enough money to handle normal expenses and unemployment for a few months, then this might be one way to protect some of your money.
This way if worse comes to worse you at least have a roof over your head, whereas had you invested the money in the market or other investments you see from the example above what can happen. Just don't count on the house for home equity loans, etc as they may not be easily available for a while.
Some gold and some T-Bills may help you diversify a bit and sleep better at night too.
J. Cogburn
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