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Stock Market Sucks: How To Protect Your 401K During Market Downturn

by Charles on August 10, 2011 · 11 comments

The world stock market is currently in a state of massive selloff. Not just the US market, but all of the major markets across the entire world have shifted for a huge downturn.  The downturn was ironically jump started with the government raising the debt ceiling to increase their ability to borrow more money. Whether we’re in the brink of another recession or not, it really doesn’t matter for our investments. Just as long as our investments are protected, we should be OK. But how do we protect ourselves from another Great Depression? I remember back in 2008 when I lost 50% of my 401k portfolio. I was too naive and financially uneducated to do anything about it. I just let it sit there during the market crash. That year, the S&P500 went from 1350 to 900 while bottoming at 750. Early 2009 saw even more losses as it went as low as 675. Eventually, everything came back up and I recouped my losses, but the damage caused was not forgotten. I decided not to make the same mistake this time around.

The market dropped as much as 45% in 2008.  So far in 2011, S&P500 has lost about 8%.  My 401k is currently sitting at 0.1% gain for the year. It’s not much of anything, but it’s much better than 8% loss. What I did was to move all my funds into the money market fund, which is essentially 100% cash. I plan out to ride out the downturn by sitting out of the market. When the downtrend appear to be over, then I will reinvest my funds accordingly. I will not lose 50% this year.

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{ 6 comments… read them below or add one }

Squirrelers August 11, 2011 at 9:28 AM

I have a friend who got out of the market before it crashed back in 2008. He told me up front that he was getting out as it started to weaken, and advised me to do so. I didn’t do it. Ultimately, it plummeted, and he bought back in when it was on the upswing.

The thing is, I think there was some luck involved for him. He took an educated guess and won. I don’t think it’s as easy as that, and people like my friend make it seem so easy and predictable. The reality is that for those of us that are average investors (includes him) it;s hard to say with confidence that the market will drop 50%. It does seem like there’s extreme volatility by the day though.

I stayed all in for now. We’ll see how that transpires.

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Charles August 11, 2011 at 9:37 AM

I agree with you. For average investor, it might be OK to just leave it the way it is. But for experienced investors, I think they are moving all their funds to cash. I tell my friends to just stay put if you plan on not looking at the market or their accounts for awhile.

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