How To Protect Your Retirement Assets From The Coming Crash

As a chronic prognosticator of doom, I’m often asked, “Do you heed your own warnings?” I sure didn’t the last time the stock market crashed. Despite forecasting the dot-com collapse in November 1999 (in an article titled, “Living in the Shadow of Vesuvius, The Dotcom Economy Parties On”) I froze like a deer in the headlights as I watched $2 million in newly earned wealth evaporate before my eyes, all the while chanting, “It’ll come back, it’ll come back!”

Never again. This time I am making contingency plans. Perhaps these will motivate you to make your own, if the recent unpleasantness in Cyprus isn’t reason enough.

First, a disclosure. I am not now, nor have I ever been, a stock picker. I take enough risks in my day job. My wife and I entrust our 401(k)/IRA retirement nest egg to a professional. His strategy is simple: no market timing, no stock picking, a balanced portfolio of Index Funds and Exchange Traded Funds split 50/50 between stocks and bonds as befits our age, inflation protection via a mix of Inflation-Protected Securities, quarterly rebalancing via formula, and low fees.

There are a number of firms that will do this for you. The one I use—appropriately named Sensible Financial Planning—is run by a University of Chicago-trained pupil of Nobel Prize winners Gary Becker, Robert Lucas, Thomas Sargent, and James Heckman. For excitement, instead of whitewater rafting down the Colorado River, he takes his family on a houseboat ride through the Erie Canal. He is very precise and cautious when he speaks and he looks like he just stepped out of the pages of theSaturday Evening Post. Works for me.

When the calamity of 2008 hit, I followed his advice to do exactly nothing, calmly continuing to set aside my maximum 401(k) contribution from every paycheck. My sensible plan rebounded just fine. Although Ben Bernanke’s Zero Interest Rate Policy (ZIRP) isn’t doing me any favors, the great mortgage meltdown left me unscathed.

But the disaster approaching is different. I don’t know when it will hit, or what will be the trigger, but it sure feels like we are heading for a repeat of 1929 rather than 2008 or 2000 or 1987 or 1975. My sensible plan does not model for a 40-percent drop in the market followed by a decade-long depression and capped off by hyper-inflation, the collapse of Social Security, and civil insurrection—just in time for me to retire to a diet of dog food. So I want an escape hatch, a place to hide, some high ground I can retreat to if necessary. I’m tired of losing sleep worrying about it. Plus it’s making me grouchy, which causes too many of my columns to sound like I am walking around wearing a sandwich board that reads, “Repent, the end is near!”

So I sat down with my advisor and said, “Look, I know your advice is to sit tight and ride out whatever comes but I can’t do it. I want a panic button I can activate with one phone call instructing you to liquidate everything and go to cash immediately. If I do this, even against your advice, what would be the sensible way to go about it?”

Thankfully, transaction costs and tax consequences are not an issue as these are tax-deferred retirement accounts, but going to cash is harder than it looks. Where do you stash the money knowing it will be safe? How can you move funds quickly, minimizing delays and intermediary risks? I don’t need access to the money until I retire, but if I’m running for the exit amidst a widening panic, the door better not be locked and there better be a fire escape on the other side that can handle the crush of a fleeing mob.

Forget money market funds. The illusion that these will be safe in a panic vanished when the Primary Reserve Fund seized up after it broke the buck. As it turns out, opening multiple savings accounts in different banks, each under the $250,000 FDIC insurance limit, is not only messy and impractical but is also subject to barriers set up by our 401(k) administrators.

So, then, we come the crux of the issue. What asset is as secure as an FDIC insured savings account, relatively immune to dramatic price fluctuations, electronically accessible under our current custodial arrangements, and a good place to park cash while waiting to emerge from the bunker?

The answer came back short-term Treasury Inflation-Protected Securities (TIPS). They are as secure as T-bills, are likely to hold their value in a panic, and might even go up if there is a widespread flight to safety. Most importantly, they offer some protection from inflation by paying out the original principal adjusted by any increases in the Consumer Price Index. Thus, TIPS allow you to leave your money safely parked, even as Helicopter Ben goes into overdrive hosing us down with more of the dog that bit us.

So there sits my panic button waiting to be pushed, its very existence easing my mind. If I get spooked and bail out too early, missing the top of the market, so be it.

I was reminded of this while reading the new Joseph P. Kennedy biography. He missed the market top, too, going to cash in 1928 when he smelled impending disaster. Like other insiders of his day, he made another fortune playing shorts on the way down, then spent the Great Depression buying up underpriced assets at fire sale prices, using his cash hoard to quickly enter new businesses like liquor distribution the moment Prohibition was lifted. His reward for all that sharp dealing was to be named the first chairman of FDR’s new Securities and Exchange Commission.

The bastard. Pour me a drink and sign me up.

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How To Protect Your Retirement Assets From The Coming Crash