How to Avoid a Stock Market Crash or 201k – Episode 233

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Welcome to the Prosperity Podcast today. Now today’s subject is the second part of a conversation. Earlier we’d been talking about 401ks and Roth IRAs, and today Kim is going to be sharing how we can avoid a 201k or when the stock market crashes. So are you there with us, Kim? Yes, I am. Happy to chat about this. Well, excellent. Now, in the previous conversation, we’ve talked about shifting the assets from a 401k to a not stock market. And so that’s to prepare or hedge ourselves from a stock market crash.

[01:06] So let’s dive into that and see what advice you have for preparing for that type of crash. Absolutely. So while I certainly hope that it doesn’t happen, wish that it wouldn’t, we all know that the stock market goes up and the stock market goes down. So whether it’s a crash or correction, whatever word you want to use, for everybody out there that is at an employer that provides a 401k or a similar environment could be even a Roth 401k, could be some type of pension or profit sharing plan, something that you as the employee get to choose the investments in and you’re still employed there. So it’s not like you can do a self-directed IRA rollover. That’s definitely a strategy if you’re not employed there anymore.

[01:55] But if you’re still employed there, you really have still some things that you can do to protect this asset because we do not want to lose principle. We do not want to go through 2008 again. And I’m always amazed how much of a forgetful mind we have as people that handle investments and clients that think about investing. And 2008 was not that long ago. And yet there are definitely people that just feel like we’re on an up ride in the stock market and have forgotten that what does go up often, often comes down. So the solution to protect your assets and keep your 401k from becoming a 201k is actually very straightforward. And it’s a strategy to use. It’s not a product that you buy. And that strategy is to take a look at the choices that you have inside your 401k plan.

[02:54] And again, this could be a TSA or it could be a 403b or it could be some other type of name, but whatever your quote retirement plan is, look at the choices that are there. You have the ability to redirect your existing balance into something that will not roller coaster ride. So typically there’s 20 to maybe even 50 different choices and you probably have your money in some type of asset allocation of probably mutual funds that are stock related, maybe even some bond oriented mutual funds, maybe even a target date fund, something like that. And what you’ll want to look for is either a fixed account or a cash account, or they might call it a money market account or some ultra conservative account whereby you

[03:47] could change the allocation from let’s say 20% growth, 20% international, 20% whatever else you got into literally 100% fixed account, cash account, or money market account. And that might seem an odd thing to recommend because typically this is long term money and yet we want to protect that principle. And by shifting your current allocation to 100% money market or cash, when the stock market crashes or corrects, your money will not go down with it. In addition to that, you can shift where your new money is going. So right now, when you put new money in, it has either same or different allocation, but it’s again probably going into the growth oriented, stock market oriented mutual funds, you can shift that as well to fixed or cash or money market.

[04:47] Spencer, can you think of any other names that it might be listed as in terms of just the availability of different types of funds inside of 401k? The majority I’ve heard is the money market account. There you go. That’s the primary that I’ve heard. Yeah, I would agree. Is there a penalty for making any of these switches? Oh, great question. Thank you. No, of course not. All you’re doing is shifting money inside. So think of your 401k as an umbrella. You’re just moving money around inside that umbrella. You’re not taking it out. You’re not doing anything different. There’s no taxes. There’s no penalty. You’re looking at a form. You can contact your human resource department or get online. You’re either going to make the change online or make the form

[05:28] be what it is and then sign it and send it in. There shouldn’t be any cost. Somebody could say, oh, well, there’s a fee or a front-end load or something like that to trade the funds because essentially you’re selling your stock market oriented funds and you’re putting the money in cash. There’s really nothing that you can do about that. There could absolutely be a fee, but it’s probably unfortunately not anything you’re ever going to see. Clearly, it would be worth it because you really want to make that change. You know, I just had this happen recently. There’s a difference sometimes between the cost of something and the expense of something. Those might sound like the same things. I’ll give you the personal example. I was needing to fly somewhere and made the

[06:17] mistake of buying a very inexpensive ticket. So my cost was low, but the expense was very high because it was a ticket that I couldn’t change. And so I got stuck and I really lost a lot of time and some valuable peace of mind. And so it was expensive. Does that make sense? That absolutely makes sense. And I think a lot of people fit into that same boat. And that’s why I ask the question if there’s a penalty because sometimes even though there’s a peace of mind sleeping better at night, having your money secure, they don’t want to make the switch because they’re afraid of losing or afraid of getting penalized. Absolutely. And if you don’t make this switch, the penalty is potentially half your 401k balance.

[07:05] That’s expensive. That is expensive. Now, is there a limit of when you can do this? Meaning you can only do this one time or only at a certain time of year? Or is this something a person could pick up the phone and take care of today? Take care of today. To my knowledge, there’s no limit as to when you could do it. There’s an occasional chance that a particular human resource department might have a rule of you can only change it again, say once a quarter or something like that. And of course, if you make a change today, it may take two or three days to take effect. And going forward, there may be some limitations as to when you could switch it back. But as far as I know, as a general rule of thumb, you could call up,

[07:54] get on the web, make that happen fairly quickly. OK, that’s fantastic. Now, when we’re talking about the corporate environment, most of the time, these decisions are not easily made. So what would be a tipping point that would cause the listener to say, OK, I need to talk to HR, make this move? Can you think of any other tipping points? Yeah, that’s a good question. I think a lot of it is just true peace of mind and true ability to stand up and pay attention. Because one of the good things, but I also think one of the challenging things about the 401k is that we just kind of put our money in there and we don’t really pay attention to it. And in a way, that’s good because we can say it’s automated savings and it forces me to put it

[08:41] in there and leave it in there, et cetera. And yet, at the same time, we know that in our lives, it’s never good to just fall asleep on something. And I think a lot of us have fallen asleep on it like, OK, this is being taken out of my paycheck. I don’t really pay attention to it. It’s in the stock market. Stock market seems up good enough. And yet, literally almost every client that I talk to these days readily acknowledges that the stock market is very high right now. Again, we’re late 2017 and it’s a concern for people when they actually do think about it. So to me, the tipping point is that realization of, OK, brain on, let’s pay attention here and make a shift. And here’s the thing. It may be a whole nother year before we have a

[09:27] crash or correction because I’ve been saying this to people for two years. And yet I believe that every single client that has made that shift in the last two years would say to you, it was worth missing out on the last one or two years of growth in order to have the peace of mind for my 401k to not get cut in half. That is so true. And we’ve both talked with so many people that saw their 401k cut in half. And this is absolutely important for people that happen to be close to retirement, close to being able to use those funds. It would be horrible if it turns into a 201k. Absolutely. It’s not worth it. Now, how can our listeners ask you additional questions or get more information about this topic?

[10:22] Absolutely. So we have a special email. It’s hello at partners, number four prosperity dot com. And then in addition to that, if they want to dig in and learn a little bit more about our thinking, be exposed to some other ideas like this, we have a special ebook available that is in audio format as well. And it’s at partners, number four prosperity dot com slash ebook. And again, I indicate there’s an audio version as well. Because of course, if you’re a podcast listener, you probably don’t read books. You probably listen to your books. So partners, number four, prosperity dot com slash ebook will get you the audio version of financial planning has failed. And it talks a lot about these ideas as well as a whole bunch

[11:11] of others that will be of interest to you. If you are ready to wake up brain on, look at your money and take some action. Thanks so much for sharing this with us, Kim. Now for you listeners that don’t want to have your 401k cut in half, make sure you check out the audio book. It is free at partners for prosperity dot com forward slash ebook. Thanks for spending time with us today on the podcast. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.