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Protecting your nest egg in a recession

Anyone nearing retirement is old enough to remember the recession of 2001.

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While the experts were debating whether the country really was in a recession -- and if so, when it would bottom out and when the recovery would start -- your portfolio was probably losing value.

It's rotten enough to see your nest egg decimated when you have 10, 20 or more years for it to recover.

But millions of Americans on the cusp of retirement experienced the devastating effect of a recession on their portfolios just prior to, or shortly into, their retirements.

9 tips from the experts:
Understand risk What to invest in now: Lancz
Why a recession is coming Be proactive
How to create a defensive strategy Know when to sell
Insure your portfolio Be aware of costs
What to invest in now: Barber    

Now, six years later, the news is peppered with stories of a slowing economy and talk of a possible recession. If retirement is in your near future, or even if it's years off, consider taking steps to protect your assets against a potential downdraft in the stock market.

We spoke with two money managers, Dean Barber, of Lenexa, Kan., and Alan Lancz, of Toledo, Ohio, who talk about what they're doing for their clients.

Where to invest now:
Dean Barber, Lenexa, Kan.: "Late 2008 is when the real pain will start." Read more ...
Alan B. Lancz, Toledo, Ohio: "Buy and hold is becoming outdated." Read more ...

In his own words: Dean Barber

The main thing people have to understand is that there is a lot of risk in our market. People get a false sense of security when the market has been up for quite some time that, this time, it's going to be different. There really is risk in the market and unless people have a well-thought-out plan, there's no way they can protect themselves.

So the first thing that has to happen is they have to have a written plan; they have to know how market fluctuations will affect them. They have to know what percentage of their money they can afford to lose before they have to get out. Most people don't know where their breaking point is. They don't know how it affects their ability to retire or how it affects their overall plan because they don't have a written plan.

Most people invest for what we call an absolute rate of return, which is looking at how much money can they make without regard to how much risk they are actually taking in order to gain that return. In their plan they should know what kind of risk-adjusted return they need. How much risk do they need to take in order to get to the return that they need to accomplish their written objectives?

Get ready for a downturn
There's no question that there's some sort of downturn on the horizon. You can't see a market that goes up for five years in a row like we've seen without some sort of substantial downturn. We think by late 2008 is when the real pain will start.

I believe that any time you're in the position like we are today, that you must have defensive strategies in place to help protect you from a potential market downturn. Those defensive strategies can be things like the put protection

put protection

An option contract that gives the holder the right to sell a certain quantity of an underlying security to the writer of the option, at a specified price (strike price) up to a specified date (expiration date); also called a put option.
that Clark Capital uses, or inverse funds, such as the ones at Rydex, Profunds or Prudent Bear, for a portion of the portfolio.

Next: "The last thing you want to do is play with your future."
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