How Should I Invest If I Just Want to Preserve What I Have Now?

BY busadmin  June 3, 2010 at 11:16 AM EDT

Question: I am 60 yrs old and have decided that I want to preserve exactly what I have in my 401k right now. Nearly all of my assets reside there. It has been a long up-and-down ride since first investing in very aggressive growth mutual funds with Vanguard funds in 1989. My gut feeling is, now that my funds have about 75 percent recovered from the last slide, that the time to get out of the market is now. What are my options if I really would be fine with no growth for preserving what I have?

Paul Solman: My simple answer would be TIPS: Treasury Inflation-Protected Securities. These are U.S. government bonds with inflation protection built in. Go here to get started on learning about them in more detail.

But, sorry to say, even with TIPS, there are risks. Say that you (like I) buy them through a 401k.

And that further, you (like I) buy your TIPS in a mutual fund, rather than the individual bonds themselves. Well, that portfolio of TIPS rises and falls in value and it’s not always clear WHY. If you buy into a TIPS portfolio at the wrong moment, you could be in for a rude ride. Look at this chart of Vanguard’s low-fee TIPS fund, VIPSX.

Note that after the Lehman bankruptcy of September, 2008, the value of VIPSX plunged — 20-something percent in just weeks. Mind you, this is the safest asset a sophisticated risk-reluctant 65-year-old investor (me) could come up with.

So there is no absolutely safe asset. Gold? Just look at ITS volatility.

My own approach is TIPS (half our pension portfolio), plus various mutual funds to diversify, thus protecting, at least somewhat, against risks like a run on the dollar or a sustained aversion to TIPS.

Our allocation of the non-TIPS 50 percent of our portfolio is mostly bonds – long and short, foreign and domestic – plus both foreign and domestic stocks (less than 20 percent of the whole portfolio). Seventy-five percent of our total assets (not counting our home) are U.S. dollar-denominated.

I’m not recommending this, mind you; just reporting. I figure I can’t do any better (or worse) than telling you where I put our money, which in turn suggests where my mouth is. Being only five years older than you, Wendell, all I’m trying to share is the metric taught to me almost 30 years ago by Nobel laureate Paul Samuelson: invest so as to be able to sleep well at night. I do. No world financial event ever plagues me with an “if only I’d…” Because I already have, as best I can.