Part 4 of the series on surviving the coming Trump economy. This part considers how to manage your 401ks, IRAs and brokerage accounts, particularly during volatile times. Currently, mutual funds are reporting all time lows in cash held in accounts. Average investors appear fully invested. Consumer sentiment surveys are at all time highs. The stock market is hitting all time highs in expectation Trump is blowing smoke on tariffs and deportations, while being serious about tax cuts and deregulation. Meanwhile, mainly professional investors are holding over 7 trillion dollars in cash (about 300 billion by Warren Buffett alone).
To say the least, expectations about what’s coming diverge.
Having seen this pattern before, and considering what Trump has threatened to do (see previous parts of this series at links below), I think a “significant correction” is coming.
Parts One, Two, and Three of the series in these links.
Changing Plans
I originally intended to write this week about what the coming Trump Crash will do to banks and how crypto and de-regulation is involved in that. And to write about the opportunity this will provide for Democrats, as long as they get out ahead of this (in predicting and warning people).
But I think it is more urgent to talk about how to prepare yourself for the coming downturn by managing your 401ks, IRAs and brokerage accounts before the correction hits next year sometime.
There will be a survey at the end. Please take it. I’d like to find out how many readers have various types of investment/retirement accounts and whether you manage them yourself or have others managing them. That will help me better target next week’s article.
Money Management on a Politics Website?
Why discuss money management on Daily Kos? We know money talks; ask Elon Musk and other billionaires filling Trump’s cabinet. So consider this as being a way you can preserve the right the Supreme Court granted your money to talk in Citizens United. (That’s a little bit sarcastic, if you need a hint.)
DO NOT PANIC if you don’t understand some of this article. Everyone can and should manage their own money, unless and until they are too enfeebled to do so.
You have earned it, and no one will appreciate its value to you more than you.
Obligatory Financial Discussion Disclaimer
First, a disclaimer. I am not a certified professional investment planner so this is advice based on 20 plus years of management experience of my own portfolios. It’s also advice based on spending nearly 30 years in China teaching their upcoming professionals about taxes, regulation and trade (both the history and the theory) so they could recover from the utter destruction of governance under Mao.
Trump’s irrationality and narcissism, and his manipulation of the MAGAs, remind me of the later Mao period and his manipulation of the Red Guards. Mao’s deliberate cultivation of chaos in order to control everyone may be more applicable to Trump than the way Hitler managed things. Though it appears Trump in his old age is leaning more toward using Hitler’s Fuhrer principle system than in his first term.
I’ll write more about these governance techniques in later articles.
I have started two small businesses, and was able to set up and manage my own retirement plans. The universities I worked for, like many of the firms you may work for, had their own plans that gave me some options for investment. Otherwise, they controlled them. I started my first firm so I could set up my own plan and control it. Working overseas at the time, I had very limited ability to set up a US based IRA. The rules required IRAs be filled with money earned in the US.
You can, and should, set up an IRA and manage it yourself if you live in the US. Twenty states now will automatically set up an IRA for you if you work with a firm with a specified number of employees and size of turnover. With a small business, even living overseas, I was allowed to set up a 401k plan and manage it. So I set up a consultancy my wife and I ran. All our writing and other non-university earnings went through that business.
On retirement and leaving China, we set up a farm, and are doing the same (managing IRAs) with that.
Quick aside: Almost anyone can grow some of their own food, even if it’s in buckets on a balcony in an apartment, as long as your HOA or property managers allow it. A packet of tomato seeds can produce tasty, money saving fruit all summer. Or you can look for a U-pick farm near you and put up (dry, can or freeze) produce of higher quality and lower price than from stores. We do U-picks of fruit we don’t grow ourselves. It can be fun for the whole family. Kids need to learn where their food comes from.
It doesn’t come in cans or pre-frozen.
Back to the topic. 401ks managed by others usually give you some options for your investments. On retirement, everyone can, and should, assume control of their 401ks as they roll over into either a traditional or ROTH IRA.
Don’t worry, we’ll explain the differences. But you can always looks things up at Investopedia. Don’t skip a part if you don’t have a 401k or IRA. The info is linked by aspects and cautions that apply to any retirement or savings type accounts.
401ks Managed by others
Many firms offer 401k retirement plans. Often they will offer to match what you put aside, up to a limit. If you can, always set aside income to the limit they match. Most times businesses will turn 401k management over to an investment firm. Often you will get 8-10 options to proportion out the money going into the plan.
You will possibly see options meant to peak in value the year you currently reach retirement age. You will also likely see options for bonds, maybe money market, and several types of stock mutual funds or ETFs (Exchange Traded Funds) and index funds. Some will be US focused, perhaps by sector of the market (a healthcare ETF is common) or by capitalization (an all large capital fund and a perhaps a small capital fund). Some will be international, perhaps dividend stocks, or large capital stocks, or a mix. And you may find ESG (environmental, social, governance) funds that select stocks based on these factors.
Many times you can research these options. Do so. Look for how much the managers charge to run the fund. ETFs usually have the lowest charges (sometimes .05% or less) while mutual funds tend to have higher charges (1% and more). Bond funds can also charge a lot in fees. Index funds (funds designed to mirror the S&P 500 or NASDAQ, for example) tend to have low fees. You will want to diversify as much as possible, that is, proportion out your contributions to different types of funds, while avoiding the highest fees, unless the fund with higher fees shows clear evidence of earning a higher return over an extended period of time than other options.
You should also see how often you can change the percentages of your contributions (once a quarter to once a year), and see if you can switch out of a fund into another, en bloc. That is, can you take money that has built up in one fund and switch it over to another?
For example, say you are concerned about risk building up in the US market and want to move everything temporarily to a money market fund, if you have that option, or into an international stocks and/or bond fund. Or that you want to move out of bonds into stocks or the reverse. Again, see how long it will be before you can change that allocation. Sometimes you can only change allocations going forward, and have to leave money wherever it was allocated previously.
When you retire or sometimes if you leave a company, you can usually cash out your 401k or roll it over into an IRA. It is far better to roll it over into an IRA, particularly one you can manage yourself. That means you can select without limit what stocks or ETFs to own and when to buy and sell them.
Why Manage Accounts Yourself?
A self managed IRA can do better than one managed by others, if you learn some basics. You can set it up to be in dividend stocks, and either take the dividends in cash or use them to buy more of the stock each quarter. I tend to let cash accumulate and look for bargains once I have a pot of dividends to use to buy another stock, or I let the cash accumulate and wait for a market downturn. On average, about every 18 months or so, markets will undergo a correction of 20% or more. About once a decade, markets drop around 50%.
So far, they have always recovered, so selling in panic during a correction is ALWAYS a bad idea.
As noted last week, if you don’t have dividend stocks but just index ETFs and the market does one of its long pauses in growth in real terms, i.e. inflation adjusted, then you could take a decade or longer to recover.
Warren Buffett calls a downturn when most small investors panic the time that stocks go on sale. That’s when he buys. He focuses on the management and longer term prospects of a company, not on temporary panics in the market. He buys a company when fundamentals justify it, and when its stock price hits fair value or even lower. Right now, 77% of all stocks are above their 200 day moving average price—in other words, money is flooding into the market and almost ignoring prices of the stocks.
That is the recipe for a panic drop in the market.
That is when you should store up money to buy stock in perfectly good companies at a bargain rate. Make them dividend payers, and you get paid while you wait for the stock price to rise again.
I have many times had an increase in dividends (actual cash flowing into my account or my pocket) even while the market was crashing and my portfolio’s overall price (not value, that’s different) seemed to be shrinking rapidly. There are many strong companies that have raised dividend payouts every single year for decades, and others that have never cut their dividend even though they didn’t raise them in exceptional market downturns, like 2008 and 2020.
I got more value out of my portfolio in downturns because my dividends went up while prices, not just of stocks, but of much else, went down. You only lose money when you sell, and selling in a panic is a sure recipe to lose.
Selling at the top of the market during a buying craze, like now, is another thing altogether. That is when you, like Buffett, store up cash for when others panic and you get excellent companies at bargain prices. If you aren’t retired and can handle up to 6 months or so before Trump manages to crash things, put your money into T-bills or money market or cash, and wait for the buying opportunity.
Buffett literally has more money in T-bills than the amount of T-bills the Federal Reserve is now carrying.
IRAs
There are traditional IRAs where the government lets you set aside a certain amount, adjusted each year for inflation and raised to a higher level when you hit 50, which you can deduct from your taxable income. When you take the money out later, then you pay tax. Usually, in retirement, your income is lower overall and therefore you pay less tax than you would have if you added that income to your current annual salary. At age 73, you have to start taking required minimum distributions that are taxed.
Roth IRAs let you put in money, usually at higher permitted amounts, that has already been taxed. The advantage is when you retire and start taking it out, you don’t pay tax on it as long as it is a “qualified” distribution. Many dividend paying companies pay qualified dividends. Others, such as REITs, pay non-qualified distributions and may end up taxed. The capital you put in has already been taxed. And you do not have to take required minimum distributions.
A Roth IRA is a better place to keep your money than a bank savings account in terms of returns. The one downside: a savings account in a normal bank is FDIC insured, while Roth IRAs might not be insured depending on which financial institution you are using (see https://www.investopedia.com/ask/answers/081915/my-iraroth-ira-fdicinsured.asp). For example, brokerages like Schwab are not FDIC insured. Also, it might take a couple days to sell investments and move your contributions out of a Roth IRA, so it's slightly slower to access your money than a savings account. You can withdraw your Roth IRA contributions at any time and for any reason with no tax or penalties" (from https://www.investopedia.com/roth-ira-withdrawal-rules-4769951). You might have to pay penalties if you withdraw the gains you made on top of your contributions, but for the contributions themselves a Roth IRA is basically like a bank account but one where you get to invest the money and potentially get a much better return.
Even something pretty secure like a money market fund currently has far better returns than a savings account. A be aware that offers for 4% on your savings may have small print that says “after one year your account will be renewed at the current .03% savings account rate or whatever prevails at the time.”
The cool thing is you can roll over a 401k or traditional IRA into a Roth IRA. You do have to pay tax on that rolled over money for the year you take it, so you have to be careful to roll over an amount that doesn’t put you into a higher tax bracket. And if you have losses for the year due to anything from a natural disaster to changing jobs or being fired or being ill and out of work, you can roll the amount you lost out of the traditional IRA into a Roth IRA and basically either not be taxed on it (if you stay under allowances), or be taxed at your usual tax rate since your income did not rise (your loss covered the amount you transferred over). The rules are complex for this, so consult a tax accountant familiar with the process.
Thinking ahead now is hard after a disaster or loss of job. But, you can take advantage of a drop in income (hopefully temporary) to raise your income after retirement. Reducing taxes in retirement can be a life saver. And disasters are coming fast and furious; almost all of us are likely to suffer losses as climate change accelerates.
SEP IRAs are self-employed IRAs. They have different rules and basically involve treating yourself as an employee. But if you do employ others, you have to distribute retirement contributions of your business equally across all eligible participants. The advantage here is if you are running a side business in your spare time, you can set up a SEP IRA for yourself as sole employee, and put the lesser of 20% of net income or $69,000 in 2024 (it is adjusted for inflation each year).
Any of these IRAs can be self-managed if you set them up with a brokerage, for example. Banks may also let you manage your own, but usually options are more restricted and buying and selling stocks and funds are more difficult to do. You can transfer IRAs of any form from a bank to a brokerage without penalty, as long as you roll the same amount from the bank to the brokerage.
Next Week: General Principles for DIY Portfolio Management (401ks, IRAs, Brokerage accounts)
Most folks think investing is an art, a mystery, or a racket. It’s not any of these. Mostly it is a matter of rules and experience and not letting the human psychology that reacts stronger to a small loss than a large gain overtake your judgement. Imagining that not thinking about money or your future retirement and putting it all into someone else’s hands to manage is about as naïve as believing that Trump tells the truth and will keep his promises.
Yes, there are good fiduciaries who will take this on for a fee, and there are A.I. (robot) advisors who do it for less, and you can even take Buffett’s advice to put it all in index funds and forget about it until they slide that gold watch on your wrist (yeah, right).
But there are better ways, and they are worth it, even if they take a bit more work. So please show up next Saturday, coffee cup in hand, and we’ll get to going over how to, as it were, grow your own money. As we all know, Democrats are going to need money as well as our volunteer time and efforts if they hope to compete with the billionaires who have now bought our government. Only then can we get money out of politics.
So, for now, arm yourselves with knowledge and, as it were, fight back by growing your own money so we can reduce the power of their’s.
