The Economy is in a complete recession...What do I do with my 401k?

Don't waste life in doubts and fears; spend yourself on the work before you, well assured that the right performance of this hour's duties will be the best preparation for the hours and ages that will follow it. - Ralph Waldo Emerson

At the time of this writing, the stock market has closed approximately 400 points down today. This is very disheartening information for many Americans today who are constantly saving money for retirement in the stock market. Although many of the analysts and financial gurus are saying that "this is the time to invest", it is hard to contribute 6% of my bi-monthly income to a retirement account only to see it decline 4-5 percent immediately thereafter. Even I find myself becoming a bit more doubtful in the future of our stock market because it just seems like every day we take one step forward, the next day we take two steps back.

This time period has given me the opportunity to begin researching other investment options outside of the stock market to learn the all important rule in smart investing...diversification.

Diversification: A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. (Cited from Investopedia)

A silver lining in a gray cloud

Some of the online analysts and experts recommend to have a 100% diversified stock allocation if you are saving 20+ years for retirement. I agreed with this particular recommendation until I came across this latest financial crisis. Now I believe that true diversification is having a mix of bond and stock securities at all times no matter the length of years to wait before retirement.

Back in July, during the time the Dow Jones index was around 11,000, I shifted about 30% of my total allocation from stocks to two specific bond securities. Although most of the positions in my 401k portfolio are down at the current moment, however the investments in the bond markets have provided a positive return.

Although a lot of focus is not placed on bonds, I wanted to highlight the two that I am currently invested in. I believe these bonds have the potential to give a decent return in the current market conditions:

1. Inflation Protected Bond Fund (TIPS)
   
• What it invests in
  The return earned on an inflation-protected bond comes from two components that respond to movements in inflation and real interest rates. The first component of return adjusts the yield by the change in consumer prices. In contrast, the second component of return operates inversely with the movement of real rates; if real rates rise, the price of the fund will fall, and vice versa. (Taken from the Prospectus on Fidelity's 401K Site)
  
2. Stable Value Fund
• What it invests in
  The fund invests in fixed-income securities and book value wrap contracts issued by banks and insurance companies, which provide for the payment of a specified rate of interest and for participant withdrawals at book value (i.e. principal plus interest). (Taken from the Prospectus on Fidelity's 401K Site)

Although they do not have great returns, something positive is better than something negative.

Timing is Everything

Although I am looking at approximately 35 - 40 years before I am able to touch the savings in my 401k and Roth IRA, I have already planned how I hope to allocate my funds as it gets closer to retirement. The strategy I plan on following is to place most of my allocated money in an aggressive (higher risk/higher return) allocations and continue to have some money allocated in more conservative (less risk/less return) investments while I have more than 10 years to touch my money.

The thought behind this is that although the stock market may continue to be volatile, I will end up positive in the long run. The goal of this type of allocation is to gain a higher interest rate than that of investing in a high yield savings accounts or in bonds.

As I approach closer to the time where I am able to access that money without penalty (within approximately five years), I will make the shift to a more conservative portfolio that will allow me to reduce my risk in the stock market and continue to keep the majority of my money on fixed rates. Although I will not potentially make as much in interest on my money, I can rest assured that I will not lose the majority of my money in volatile stocks. An example of a conservative portfolio is 75% bonds and 25% stocks.

Eyes on the Prize

The key to succeeding in long term investing is to develop a plan and stick to it. Although I have seen the value of my funds decrease over the past few months, I have seen the overall number of the amount of shares that I own increase. I have continued to contribute to my stocks to continue increasing the shares that I own. It is my hope that the economy will rebound soon to help continue to increase the overall value of my retirement plan.

How are you holding out with your 401K plan? Do you still contribute? Share your thoughts below.

Surviving the Recession...Getting Back to the Basics

To use fear as the friend it is, we must retrain and reprogram ourselves...We must persistently and convincingly tell ourselves that the fear is here--with its gift of energy and heightened awareness--so we can do our best and learn the most in the new situation. -Peter McWilliams, Life 101

Earlier this week I took a trip to New York for my job. Now, I am by no means a fan of airplanes, but I understand that they are relatively safe and each time I have flown, I made it safely to my destination. So in my mind, it was going to be business as usual as I settled comfortably in my coach seat, although there was a slight drizzle coming down and the sky was painted gray with clouds at Hartsfield Airport.

The most fearful part of flying for me is taking off as I have heard that many say that the highest risk of something going wrong is during that part and landing. As we aligned ourselves straight on the take off runway, I hear the engines roar and we are off. As I feel the plane separate from the ground, I notice that everything seems to be going normal. Just as I get ready to breathe a sigh of relief, the plane takes a sudden drop. My stomach goes to my chest and we hear the captain of the plane say "Please remain in your seats with your seatbelts fastened as we are going to be in rough air".

Shortly after the intercom turns off, the plane takes another dip and I look around to see other people with fear obviously on their faces. I begin to think to myself that this is the end and say a short prayer as I may be getting ready to meet my Maker. However, the captain continues to push the engines full throttle and after we experience a few more dips, we finally level off at 41,000 feet where the air is a little smoother. Needless to say, although we experienced a few more bumps in the air, we arrived to our final destination safely and in one piece.

Later that day, I realized that the airplane ride was a strong analogy to what our economy is going through right now. We are currently at the point where most Americans are looking at each other with fear on our faces thinking some variation of "this is the end". However, just as the captain did what it took to navigate through the turbulence in the air, our government will do the same. Although we may go through a few more bumps while trying to get to our final destination, ultimately we will arrive safely.

If you do not know that a recession is going on right now, then this is your wake up call. All the times of spending more than we make, eating out, burning gas, etc are coming to an end. Below are some of the basic principles that I am using to survive this recession.

1. Budget.
• One of my friends always budgets and sets aside a specific amount of cash that he can spend at his discretion (eating out, partying, etc). He does this because it really resonates with him as he sees cash leave his fund as well as allows him to think twice before spending the money. Once that money is gone, he knows that he has to wait until his next paycheck before he can do any further discretionary spending.
  
2. Save at least 10% per paycheck.
• One of the most important assets to have during tough times is a fund that is highly liquid (Emergency Fund). This comes in handy to carry you in between pay periods as well as cover any unexpected expenses that can occur while money is tight.
• Devoting 10% of each paycheck to a high-yield savings fund will add up quickly. Recommended bank where I keep my Emergency Fund: HSBC
  
3. Plan out trips.
• Having a car is quickly becoming a larger and larger expense because of the cost of gas. Planning out the trip and knowing exactly where you are going prior will allow you to consolidate trips and conserve gas rather than having to make multiple trips in one day.
4. Cook.
• On average, I spend about $7/meal when I eat out at a (decent) fast food restaurant. When I eat at a sit-down establishment, that goes upward to $13 - $15 (tip included).
• My average meal at my house costs about $15 to make, however, it typically lasts for 3 days. I typically eat leftovers twice a day for those three days which roughly equals 6 meals total. Doing the math, you see that my average cooked meal costs $2.50. Big big savings!
  
• Below are some useful websites with quick and easy recipies.
  
• Kraft
  
• All Recipies
  
5. Work Overtime (if your job allows it).
• Overtime is great because it typically pays 1.5 times your hourly rate as well as it typically does not require any extra work outside of your regular job.
• Overtime gives extra unbudgeted income that can be used to weather the recession period.
6. Turn a hobby into Entreprenuership.
• One of my biggest hobbies is computers. I have turned my hobby into a small entreprenuership where I help out people with any computer problems they may have. This is a double win because I get money for doing something I would do for free as well as people save money by using my services rather than some big company that charges an arm and a leg for the same service.
  
• Some other entreprenuer ideas...fashion consultant, tutor, dance instructor, bartender, party planner...get CREATIVE.
  
7. Find creative (cheap) sources of entertainment.
• Game nights have become a regular routine amongst my friends. Rather than going out to spend money, we typically organize a game night or crank up some Rock Band and have a blast..
  
• Another interesting idea to do is have a potluck dinner where each of your friends cook an item and create a buffet of food. Just make sure your friends can cook.
  

No one said this was going to be easy, however, it is very doable. The key is to not give up and become very resourceful to make it through these turbulent times. So fasten your seatbelts and hold on because the ride is going to be bumpy, but if we stay the course, we will make it through it. What are some of your tips to make it through this recession period? Please share them in the comments below.