Ten Ways to Protect Your Money - and Your Sanity

It's certainly an understatement that this is a tough time for investors. Trillions of dollars of paper wealth has evaporated as steep price declines in stocks as well as municipal bonds, corporate bonds and real estate have all occurred at the same time.

As investors, we've been conditioned to believe that placing money in stocks is the smartest and best way to save and accumulate wealth over the long run. Just observe the words used to describe investors in the news. People getting out of the market are described as panicked, irrational, illogical, fearful, emotional, reptilian, rattled, and stodgy. People in the market are smart, steely, courageous, cool aggressive, confident and winners. The conditioning continues even in these difficult times.

Most people would rather see steady growth of the principal of their investments in lieu of the wild fluctuations associated with the stock market. There are safe alternatives to the instability and stress associated with losing 40% of your retirement account in just a short period of time. Here are ten ideas for the investor that wants to protect their money to consider:

1) Be Prepared for a Panic - The conventional wisdom is not to panic when markets decrease. Good advice. However, it's critically important to consider how your portfolio will behave in a buying or selling panic. Markets are emotionally fragile and can move to high extremes of exuberance or sink into the depths of despair.

2) Don't Count On Modern Portfolio Theory - Asset allocation and diversification helps to reduce market risk but does not eliminate it. Most investment professionals evaluate performance by comparing returns to a benchmark index such as the S&P 500 index. Success according to the professionals is beating the index. It's of little comfort to an investor if their portfolio is down 28% and the benchmark is down 30%.

3) Forget About the Long Term - Financial gurus such as Suze Orman and Jane Bryant Quinn will have to rewrite the sections of their books where they state that the market has never suffered a loss over a 10 year period. A $1,000 investment in the S&P 500 index in October of 1998 was worth $900 in October of 2008.The impressive returns of past market cycles are not necessarily prologue to future returns.

4) Avoid Stock and Mutual Funds That Buy Stock - Having money in stocks or mutual funds that buy stock is analogous to gambling. Recent market volatility graphically illustrates the fact that it is impossible to predict with any reasonable degree of certainty the return on our money much less the return of our money.

5) Don't Be a Victim - Excessive executive compensation usually comes up due to the exercise of executive stock options which reduce the value of existing shareholder shares. Options can be used as a legal means of stealing from the shareholder/owners of the company. Shareholders actually fund and are victims of excessive compensation fraud. There are better and safer places to put money to work than the stock market.

6) Pay Off Debt - Paying down a debt that is at a 12% interest rate is like making an investment with a guaranteed 12% minimum rate of return. Where else can you get that? Living within our means with the objective of eventually being debt free is the lowest risk/highest return approach to investing that an individual or family can embark upon.

7) Roll your 401-K - Salary reduction pension plans such as 401-k's are a convenient means of saving for retirement and are important. Unless you anticipate using the loan provisions in these plans, it's critical to roll your 401-K to a self-directed IRA where you have investment options beyond a slate of mutual funds.

8) Be Aware of the Mind Games - Individual market participants can easily get caught up in the emotional aspects of having their fortunes tied to unpredictable movements and events. In up markets we become giddy and proud of our business acumen and don't sell. In down markets we become anxious and hope for a market comeback. A common mistake is the thought "I can't afford to get out now."

9) Certificates of Deposit - The principal of a CD is currently backed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank, per account until December 31, 2009. The FDIC is backed by the full faith and credit of the United States government. If you believe that US treasury securities are safe you should feel secure with CD's.

10) Indexed Linked Certificates of Deposit - You can create a diversified investment portfolio tied to changes in commodity prices, domestic stock indexes, foreign stock indexes, the value of the dollar etc. without risking principal if the investment is held to maturity. For those that are afraid to be in the market but at the same time are anxious when out, indexed linked CD's have proven to be very beneficial to investors that have discovered them since their introduction to the investment scene in the 1990's.