How to Protect Your IRA From the Coming Decline
Millions of Americans have a problem.
Actually they have three problems.
First, they have about $3 Trillion in stock mutual funds.
Second, the bulk of that money is counting on the market to go up in order to profit.
And third, investment advisers continue to tell those investors that they are doing the right thing.
Will the market go up this year or next? With a $10 trillion dollar national debt, US unemployment approaching 10%, banking in crisis all over the world, mortgage and credit card issues yet to surface, and another dozen problems, it doesn't seem to me that we can count on a good bull market over the next few years.
What this means is that all of that money tied up in long stock mutual funds may make money in 2009, but could easily lose more money in 2010 and 2011.
Older Americans are putting off their retirement after losing 30-40% in 2008.
Will they have to put it off some more? There is a reasonable chance of another correction in late 2010 or 2011.
Will it be 20%? 30%? There is a solution to protect your money.
You need to learn how to use bear market Exchange Traded Funds (ETFs).
A bear ETF (also called a "short ETF") is a fund that is set up to profit as the market falls.
If you buy the fund that is the equivalent of the opposite of the S&P 500, your investment will rise a dollar whenever an S&P 500 fund falls a dollar.
ETFs are baskets of stocks that trade on the exchange just like a stock.
You pay the usual small commission to buy and sell shares.
There is a minimal investment fee included in the performance.
They have none of the other mutual fund fees.
Go to on the Yahoo Finance Education Center for more information on ETFs.
For a listing of the inverse, or bear market ETFs, click on "View ETFs" in the left-hand column.
Then in the Category box, select "Bear Market" and click on "View".
This gives you a list of the choices you have for investments that profit when the market is going down.
Three of the most common choices in this arena are the Short S&P 500 (SH), the Short Dow 30 (DOG), and the Short NASDAQ 100 (PSQ).
If you are more aggressive, you can buy the Ultra funds.
An Ultra fund goes up twice as fast as the underlying index goes down.
This is not recommended for beginners.
There are also the 3X Bear Funds, which are the real roller coasters.
Because of the way they work, Ultra funds are not recommended for more than a day or two at a time.
How should you use these bear funds? First, you will need to transfer some of your money from your traditional mutual funds into a self-directed IRA.
At companies like Fidelity, you can do this and stay with Fidelity.
For other companies, you may have to open a brokerage IRA and transfer money into it.
There is no tax penalty for transferring money between IRA accounts.
Once you have a brokerage IRA, you can buy ETFs with it.
If you think the market is headed up, you can buy long index ETFs, such as S&P 500 (SPY), Small Companies (IWZ), or the NASDAQ (QQQQ).
These funds will perform similarly to your growth funds at your mutual fund company.
However, the advantage is that in a second, you can change direction with these funds and adopt a conservative cash position, or a more bearish stance.
You can't do that very easily at a mutual fund company.
How do you know when to buy short ETFs vs.
long ETFs? One simple way is to watch the price of the ETF and compare it to the 20-day Simple Moving Average (SMA) and the 50-day SMA.
If the price falls through the 20-day SMA, consider moving some funds to the short side.
If the price crosses below the 50-day SMA, that's often a pretty good sign the market is headed down, and you might want to consider moving more of your brokerage funds into short ETFs.
When the price moves back above the 20-day or the 50-day, consider moving back to long ETFs.
Each investor has to determine his or her specific approach.
One common method would be to move half of your mutual fund investments into a brokerage account and keep in mix of an S&P 500 ETF, a Nasdaq ETF, and a money market fund.
When the moving averages tell you we're headed south, start moving your funds to the short side and pick up some SH or DOG.
There are other methods to protect your IRA.
Options can be used for protection.
Put options protect your investment if the market starts to fall.
A covered call strategy (buying stock or ETFs and simultaneously selling Call options) can also work well for small corrections.
The important point to remember is that you can protect your investment.
You don't have to watch your retirement turn to dust hoping that things will turn around in the long term.
By using short ETFs, or learning how to use some options strategies, you can cushion the downside a little bit while taking advantage of the upside.
Hopefully this will allow you to retire on schedule.
For some great information on ETFs, visit Yahoo Finance at http://finance.
yahoo.
com/etf.
Actually they have three problems.
First, they have about $3 Trillion in stock mutual funds.
Second, the bulk of that money is counting on the market to go up in order to profit.
And third, investment advisers continue to tell those investors that they are doing the right thing.
Will the market go up this year or next? With a $10 trillion dollar national debt, US unemployment approaching 10%, banking in crisis all over the world, mortgage and credit card issues yet to surface, and another dozen problems, it doesn't seem to me that we can count on a good bull market over the next few years.
What this means is that all of that money tied up in long stock mutual funds may make money in 2009, but could easily lose more money in 2010 and 2011.
Older Americans are putting off their retirement after losing 30-40% in 2008.
Will they have to put it off some more? There is a reasonable chance of another correction in late 2010 or 2011.
Will it be 20%? 30%? There is a solution to protect your money.
You need to learn how to use bear market Exchange Traded Funds (ETFs).
A bear ETF (also called a "short ETF") is a fund that is set up to profit as the market falls.
If you buy the fund that is the equivalent of the opposite of the S&P 500, your investment will rise a dollar whenever an S&P 500 fund falls a dollar.
ETFs are baskets of stocks that trade on the exchange just like a stock.
You pay the usual small commission to buy and sell shares.
There is a minimal investment fee included in the performance.
They have none of the other mutual fund fees.
Go to on the Yahoo Finance Education Center for more information on ETFs.
For a listing of the inverse, or bear market ETFs, click on "View ETFs" in the left-hand column.
Then in the Category box, select "Bear Market" and click on "View".
This gives you a list of the choices you have for investments that profit when the market is going down.
Three of the most common choices in this arena are the Short S&P 500 (SH), the Short Dow 30 (DOG), and the Short NASDAQ 100 (PSQ).
If you are more aggressive, you can buy the Ultra funds.
An Ultra fund goes up twice as fast as the underlying index goes down.
This is not recommended for beginners.
There are also the 3X Bear Funds, which are the real roller coasters.
Because of the way they work, Ultra funds are not recommended for more than a day or two at a time.
How should you use these bear funds? First, you will need to transfer some of your money from your traditional mutual funds into a self-directed IRA.
At companies like Fidelity, you can do this and stay with Fidelity.
For other companies, you may have to open a brokerage IRA and transfer money into it.
There is no tax penalty for transferring money between IRA accounts.
Once you have a brokerage IRA, you can buy ETFs with it.
If you think the market is headed up, you can buy long index ETFs, such as S&P 500 (SPY), Small Companies (IWZ), or the NASDAQ (QQQQ).
These funds will perform similarly to your growth funds at your mutual fund company.
However, the advantage is that in a second, you can change direction with these funds and adopt a conservative cash position, or a more bearish stance.
You can't do that very easily at a mutual fund company.
How do you know when to buy short ETFs vs.
long ETFs? One simple way is to watch the price of the ETF and compare it to the 20-day Simple Moving Average (SMA) and the 50-day SMA.
If the price falls through the 20-day SMA, consider moving some funds to the short side.
If the price crosses below the 50-day SMA, that's often a pretty good sign the market is headed down, and you might want to consider moving more of your brokerage funds into short ETFs.
When the price moves back above the 20-day or the 50-day, consider moving back to long ETFs.
Each investor has to determine his or her specific approach.
One common method would be to move half of your mutual fund investments into a brokerage account and keep in mix of an S&P 500 ETF, a Nasdaq ETF, and a money market fund.
When the moving averages tell you we're headed south, start moving your funds to the short side and pick up some SH or DOG.
There are other methods to protect your IRA.
Options can be used for protection.
Put options protect your investment if the market starts to fall.
A covered call strategy (buying stock or ETFs and simultaneously selling Call options) can also work well for small corrections.
The important point to remember is that you can protect your investment.
You don't have to watch your retirement turn to dust hoping that things will turn around in the long term.
By using short ETFs, or learning how to use some options strategies, you can cushion the downside a little bit while taking advantage of the upside.
Hopefully this will allow you to retire on schedule.
For some great information on ETFs, visit Yahoo Finance at http://finance.
yahoo.
com/etf.
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