Build a Better Nest Egg

The stock market lost 38 percent in 2008. But if you lost more than 20 percent, your problem wasn’t really the stock market—it was the design of your nest egg. Storms occur in markets, as they do in the real world, but your home shouldn’t be flooding every time they happen.

You know intuitively that your retirement plan doesn’t work. Your nest egg has drowned twice in the last eight years. You were elated with your returns in 1999, and then devastated when your assets imploded during the dot-com bust of 2000 through 2002. Same thing happened when the Dow Jones Industrial Average broke through 14,000 in October 2007, only to drop below 8,000 in 2008. If you had a healthy fiscal plan, your nest egg wouldn’t be sinking all the time.

And contrary to what your financial advisor may be telling you, the markets returned only 4 percent during the last 10 years, not 12 percent. That was less than a percentage point above treasury bills, at 3.3 percent annual gains, with much more risk.

Sound Nest Egg Strategies

Rule 1: Always keep a percent equal to your age.
Modern portfolio theory, the cornerstone of a healthy nest egg, has been around for half a century. (Harry Markowitz, the economist who wrote it, won a Nobel Prize in 1990.) Many financial professionals are paid on commission to sell you mutual funds, so if you weren’t protected from the 2008 financial crisis, chances are: 1. Your financial planner just didn’t know the theory. 2. They weren’t paid to employ the theory. 3. They had bosses who pushed sales hard and couldn’t employ the theory. Or, 4. They were dumb enough to think they could outthink a genius Nobel laureate.

Rule 2: Grade Your Financial Planner
You wouldn’t hire an architect whose buildings flood in a storm. Since there are so many “professionals” and “pundits” spouting off even though they drowned their clients’ nest eggs in 2008, it’s your job to take charge and design a better dream life. As TD Ameritrade Chairman Joe Moglia says, “Nobody cares more about your money more than you do.”

Bears get lucky in bear markets. Bulls get lucky in bull markets. Sound nest egg strategies work in any market!

How to Grade Your Financial Planner

Add up your losses. If you lost more than 20 percent in 2008, your financial planner isn’t making the grade.

Check your allocation. If you didn’t start 2008 with a percent equal to your age safe in treasury bills and-or high-rated bonds (GM, Fannie Mae, etc., do not qualify), your financial planner isn’t looking out for your best interest.

Rule 3: Act Now and Get in Great Fiscal Shape!
Blind faith lost you a lot of money in 2008. And 2009 is shaping up to be another stormy environment in stocks, which means that if you don’t pull your head out of the sand and get a better dream life plan, you’re going to be buried.

My Golden Nest Egg Formula

Always keep a percent equal to your age safe. Treasury bills are the safest investment today. (High-rated bonds, money markets and CDs are traditionally safe, and will be again in the future.)

During recessions, overweight 15 to 20 percent additional into safety. Cash is king in a recession, i.e., not losing is winning. You will not be stuck overweighted in cash forever. If the markets continue to drop in 2009, you’ll be glad you employed this defensive strategy and have cash to invest when everyone else is scrambling to hang on or are selling low to cover basic needs.

Diversify the remainder of your nest egg into 10 exchange-traded funds (ETFS). You will find detailed pie charts in my book, Put Your Money Where Your Heart Is.

Invest in emerging industries, not dying companies. General Motors and Ford Motor Company, combined, are worth less than one-tenth of Toyota Motor Company’s $102 billion. It is not just that Ford and GM have more expenses. GM and Ford lost market share this decade because their gas-guzzlers were far less popular than the fuel-efficient Prius and other Toyota models.

Know what you own, i.e., not mutual funds. The top mutual fund holdings in the United States in 2007 included some of the most poorly run companies, including General Motors, AIG, Fannie Mae and Phillip Morris Tobacco Company. ETFs allow you to target sections of the stock market by size (small, medium and large), style (value and growth), industry (gold mining, clean technology, international, biotechnology) and more.

Don’t trade. If you don’t know how to take your profits early and often, and-or if you don’t know how to buy put options, do not buy and sell individual companies at all in 2009. (Own companies you love in ETFs, where you are more protected from the price fluctuations of any one individual company.)

If you used this six-step formula and rebalanced only once a year (say in January), you could have captured your gains in 2000 at the NASDAQ high. Likewise, in January of 2008, you would have captured your Dow Jones Industrial Average gains before the major fall-off and redistributed. Identifying where your gains are coming from allows you to increase your assets and redeploy your holdings back into a sound, dream-life blueprint, which is a combination of the modern portfolio theory, ETFs, common sense and basic investing recipes.

©2008 Natalie Pace

About Natalie Pace
Natalie Pace is the founder and CEO of one of a financial news organization. She has been ranked as a No. 1 stock picker from TipsTraders.com and has partnered with Forbes.com. She has repeat guest appearances on Fox News, Good Morning America and National Public Radio, and has appeared in Time, More, USA Today and Kiplinger’s Personal Finance. For more information, go to http://www.nataliepace.com/.

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