“Chicken money” is money you can’t afford to lose. It’s that simple.  The amount of chicken money you need depends on your overall financial situation, stage in life, and risk tolerance.  Just about everyone needs some money that is not intended for ordinary spending and not part of your  investment program.

Chicken money should be set aside in safe, short-term investments, like insured bank CDs, a money market mutual fund, or U.S. government Treasury bills. You may get very little return ON your money, but you don’t have to be concerned about the return OF your money!

Note: It’s important to compare returns offered on these safe investments.  Currently, interest rates on CDs at banks may be far lower than the nearly 2.5 percent returns you could get on Treasury bills.  (Read my recent column on how to buy T-bills at www.terrysavage.com.)

The Long Run

Over the long run, these safe investments won’t outpace inflation as a diversified portfolio of stocks can be expected to do.   But they are considered essentially “riskless” places to put your money.  The time to consider your risk tolerance is when things are calm – not in the midst of wild moves in the stock market.

Unfortunately, recent history has made people forget the possibility that the market can go down – and stay down – for longer than you might imagine.   In the 1972-74 bear market, the Dow fell from over 1,000 to a low of 570 – a nearly 50 percent decline.  Even worse, the market then stayed around 800 for nearly a decade, causing many to give up on stocks.

Having “chicken money” on the sidelines allows you the luxury of making sensible decisions when others are panicking. The knowledge that you have a significant portion of your nest eggs in a place that won’t let them crack, gives you the self-discipline to stick to a sensible, long-term plan of stock investments.

What to Do Now

It’s not too late to re-evaluate your need for chicken money – and move some dollars out of the risk category and into the “sleep well” category. After all, you should still have plenty of profits from the 10-year bull market.  Here’s how to start:

• 40l(k) Plan. These retirement plans are intended to be long-term investments, designed to grow the money of younger workers over the years. As a result, there are very few investments within them designed to allow you to “chicken out” of risk! But older workers need to protect profits.
• Review the investment choices in your plan. If your plan doesn’t offer a money market fund, check for a “stable value fund” option. It is really an insurance contract that pays a steady low rate of interest, but offers safety of principal. Or your 40l(k) may offer a very short-term, high rated bond fund. Bonds lose value when interest rates rise, but the shorter duration of these funds will limit losses.
• IRA Rollover Accounts.   Always roll over your 40l(k) when you leave your job or retire, because you’ll find a wider choice of investment options outside your company plan. (You can’t roll over if you’re still working at the company.) If you still have money in an old plan from a previous employer, contact Vanguard or Fidelity to do the direct rollover — and then choose more conservative investments.
• Target Date Funds. Many workers default into these funds inside their 40l(k), thinking they will manage risk. But even nearing retirement, many of these plans have a very high exposure to the stock market as they plan for growth during your retirement. Don’t be afraid to switch some money into the stable value or short-term bond fund to protect your profits.

Over the long run, the stock market and America have always been a winning bet. And if you’re not going to be withdrawing from your plan for another twenty years or more,  don’t let market headlines keep you from sticking to your regular investment plan.  Even retirees need some conservative stock market exposure to generate growth and protect against inflation.

But sticking to your sensible investment plan becomes a lot easier if you have enough “chicken money” to tide you through a few bad market years. And that’s The Savage Truth.