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Rebalancing My 401k

By: Steve Johnson

12/16/2008 - 52 Comments

The drastic market correction in 2008 has taken quite a bite out of many 401k balances this year.

Many of my co-workers and family members that refused to listen to my dire economic advice are down 40-50% this year.  And every personal finance blogger that I am aware of that has posted their 401k results for this year has lost money. 

Meanwhile, because of my assessment of the coming economic recession last year, I moved my entire 401k into bonds at the end of last year.  Guess what, my 401k is up 3.5% for the year

Now I’m considering what is going to happen next year and how I should rebalance my 401k. 

Next Year, The Dollar Sinks

For starters, I think 2009 is going to be the worth year for the economy since the Great Depression.  I think the stock market could lose another 2-3 thousand points off the top as industry after industry fall to the deepening recession and unemployment continues to increase all year.

But I have a bigger concern.  My biggest worry is that the dollar is replaced as the worlds Reserve Currency with the Euro or Yen or several other currencies or combinations thereof.  The dollar is teetering on collapse as the world is running out of willingness to continue to borrow money to us as the global financial crisis is reversing their investments in dollars. 

Foreign nations like China, Japan and India are going to need to use their trillions of dollars worth in their sovereign wealth funds to stimulate their own economies, let alone fund our stimulus by borrowing us more money.

We can choose to ignore the evidence against the dollar all we want, but eventually the evidence will demand a verdict.  Here are a few other reasons that the world may face a dollar currency crisis very soon.

  • The (3-month) bond market is now at zero.  It seems as if everyone who has moved into bonds to escape the falling stock market during the panic, but now when they begin moving their money out of bonds the demand for dollars will surely drop.  Whoever is buying these is nuts.  The cost to purchase these bonds makes the net result cost you money to buy them.
  • Yesterday the Federal Reserve lowered the effective interest rate to virtually zero, which is an all time record.  That should be a very clear sign that this is no small recession that we are facing. This is the big one.  
  • President Obama has pledged to attempt to spend the economy out of the recession, but he will have to borrow and print and tax trillions of dollars just to try his plan. None of this will be good for the dollar.
  • Many of the foreign nations are in a much better financial position that they US. Yes, they are also in a recession, but they have a 25% saving rate and their governments have trillions of dollars in reserve.  All we have is a printing press.  Therefore, foreign currencies should rise against the dollar to reflect their stronger economic positions.

Rebalancing my 401k

In light of my economic assessment, I have to move my money out of the bond market before the dollar drops anymore.  Sure, bonds are safe if you just want to preserve your dollars, but I don’t want my dollars back after they have lost 90% of their value.  I also think many of the foreign markets are over sold from the rush to the bond market with little respect for the company’s earnings.  When the dollar drops, inflation will come back with a vengeance and that will drive up the prices of commodities – especially gold.

Therefore, as of today, I’m rebalancing my 401k into foreign markets (50%) and precious metals (50%).


I am not a licensed financial advisor, so please consult a licensed professional before making any investment or financial decision. 

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