5 ways to protect your nest egg from a volatile stock market

by Jim Sloan

The latest economic news has not been especially good for people who are approaching retirement and moving their money out of the stock market and into "safe investments" like savings accounts, online savings accounts, a certificate of deposit or money market accounts.

Conventional wisdom holds that you should reduce your exposure to stock market volatility as you get closer to retirement by looking for the best cd rates or high yield savings accounts, and moving an increasing percentage of your portfolio into these FDIC-insured safe harbors.

This type of approach protects you from sudden drops in the stock market--such as the slide that occurred after Standard & Poors lowered the United States' debt rating--and keeps your nest egg from shrinking suddenly and forcing you to return to work after retirement.

But since 2008, interest rates on many Cds, and even the best savings accounts, have hovered just over zero percent. And the recent decision by the Federal Reserve to keep interest rates low through 2013 means that savers are being penalized for doing the right thing by putting their investments in money market accounts or savings accounts.

Interest rates are lagging behind inflation

According to USA Today, the average interest rate for a 1-year certificate of deposit is 0.43 percent, and the average money market fund is yielding 0.1 percent.

As the Wall Street Journal recently noted, our bills are going up 5 percent a year or more, so when our savings accounts are earning such low interest rates, we are effectively losing money. When interest rates are kept below inflation rates, economists call in "financial repression"--doesn't sound good.

Some reasonably safe alternatives

So what are you supposed to do? Here are some options:

  1. Ride out the market fluctuations: Although there was a big dip in the market following the Standard & Poors announcement, the market has clawed its way--at least partially--back. USA Today notes that since the Fed's decision on interest rates is aimed at getting people to essentially quit saving and start spending, more and more people are likely to continue investing in the stock market, driving prices back up.
  2. Move out of stocks and into fixed-income funds: According to USA Today, that's what many 401(k) investors have been doing since the first post-S&P plunge.
  3. Purchase Treasury inflation-protected securities, or TIPS: According to the Wall Street Journal, the interest paid on TIPS increases with inflation, which secures the money's purchasing power.
  4. Invest in bond funds that invest in short-term debt: According to the Journal, this option is good for investors who won't need the money for two or three years.
  5. Build up your portfolio of high-quality dividend-paying stocks or exchange-traded funds, which are mutual funds that trade like stocks. According to the Journal, ETFs with high-dividend stocks yield around 3.5 percent.

Regardless of your strategy, it's important to avoid rash, fear-driven decisions based on short-term market fluctuations. According to the McClatchy-Tribune News Service, studies show that stocks bought and sold within a year can lose or gain as much as 40 percent, but stocks that are held for at least 10 years almost always make money.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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