Check Your 401K

Protect your savings against a very big, hidden risk

“Know well the condition of your flocks, And pay attention to your herds” Proverbs 27:23

When I had rental properties, I considered them as my ‘flocks and herds’.

Now, it’s my stocks.

I forgot to turn my mic up, so you’ll need to turn yours up higher than usual…

If you have a 401K or 403B, you normally wouldn’t need to pay much attention. It’s a long term investment, a retirement plan, and in the long term, the ups and downs of the market are just little blips.

40 years of standard investment advice is out the window today

A whole generation of investment advisors have gone by this rule: Invest in a mix of stocks and bonds. Since the general trend of stocks is up, because in the long run, successful businesses keep up with inflation, it’s usually suggested to have a diversified portfolio, with plenty of growth stocks included. A young person would be 80% in stocks and 20% in bonds. The closer to retirement, the more would be put in bonds, eventually reaching the other extreme - 80% bonds and 20% stocks, the thinking being that bonds are a stable way of preserving capital and paying guaranteed interest, without the volatility of stocks.

complacency is dangerous

We are currently going through one of the biggest transitions in government policy in our history. It’s time to take a look at the allocation options in your 401K or 403B.

The transition began in March 2022. After decades of ridiculously low interest rates, and the resulting bull market and inflation, the Federal Reserve finally had to start raising rates. They had been near zero. Those days are gone. It’s a new ball game. Now interest rates are running about 4%. Much of the huge $37 Trillion of US debt was acquired at much lower rates - near zero. Not only that - but since short term bonds have lower rates than long term, the government kept borrowing on the short term. Now it has to be re-financed at the higher rates. It’s time to pay the piper. The situation is unsustainable. A whole generation of ordinary people are about to face a sea change in what will happen to their retirement savings, if they don’t realize that the advice they’ve been getting all their lives is now exactly the wrong thing to do. The easy money pushed growth stocks to dizzy heights and they’re extremely vulnerable to a serious crash, and so are bond values.

What to do

Change the allocation in your 401K or 403B. You can change the allocation mix at least every 3 months on a 401K and usually a 403B allows even more flexibility – like a change every pay period.

CNBC wrote about the risks of cash, like bond funds, but the article never mentioned the risk of a sudden devaluation. They only mentioned the slow, long term risk of losing out on the supposedly ever upward trend of stocks, and losing value on bonds due to inflation. “April 7 saw the highest volume of 401(k) plan trading since March 12, 2020, according to Alight Solutions, a retirement plan administrator. About 94% of proceeds moved to conservative assets like money market, bond and stable-value funds, according to Alight.” emphasis mine - People keeping their money in market funds or bonds are at great risk if the President does end up devaluing the dollar like FDR did in 1933 and Nixon did in 1971, when he decreed that foreign countries could no longer redeem their US dollars in gold. Most investment advisors today weren’t around in 1971.

Actually, the first cracks in the system were in 1965, when dimes and quarters and half dollars were no longer made out of 90% silver. Then in 1968, you could no longer take a dollar bill that said ‘silver certificate’ to the bank and be given a real silver dollar in exchange. Look at your dollars today - they no longer say ‘silver certificate’ - they say ‘federal reserve note’. They’re just an IOU!

Mutual funds emphasizing growth stocks are risky today, when stocks are still so highly valued and when the risk of a devaluation is significant. So are bonds and annuities. Look for a fund that emphasizes recession resistance, like dividend funds and utility funds.

Most investors and people less than age 60 have little or no memory of 1971 when Nixon took the dollar off the gold standard, effectively devaluing the dollar, and the roaring inflation that followed.

Ray Dalio, of Bridgewater Associates, said recently in a Bloomberg interview with Barry Ritholtz, said:

“The one thing that I learned about early on, particularly when the dollar in 1971 was broken from gold, is that many things that surprised me had never happened in my lifetime before, but they happened many times in history before.”

Ecclesiastes 1:9-11 says

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