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Assuming one or more of the big investment banks incurs unsustainable investment losses leading to another banking crisis, what is the safest place to invest my 401k?

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The following info can help give a more specific answer for your situation: Are you accessing your funds already? What range is your savings in? (0-500k or more in the range of 1 mil+) –  Kirill Fuchs Jul 10 '12 at 17:55
    
nowhere near $500K even... this is sort of a theoretical question. –  nielsbot Jul 10 '12 at 18:01
    
I am not asking to spur an argument. You may agree/disagree that another economic "crisis" is coming. The banking crisis assumption of the question is a scenario. –  nielsbot Jul 10 '12 at 18:38
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401k accounts can be invested in various instruments, correct? These may be affected by a banking crisis, can they not? Also, I am not asking for 100% safe investments, I am asking for the best investments assuming there is another crisis. Perhaps my wording of the question is unclear. –  nielsbot Jul 10 '12 at 18:41

3 Answers 3

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You have a few options, depending on what you believe would be safer. This also depends on when you would like to access your 401k. If your going to be retiring in 10 years then you wouldn't care what happens in the next 3 years so much.

I will assume your accessing your retirement account already...

Cash

If you are scared of a banking collapse you can always just hold your money in cash, it is the most liquid. Unless you have more then what the FDIC will insure that is probably your safest bet.

Bonds

You have the option of putting your money in bonds. Historically, treasuries are the safest.

TIPS - Is another vehicle you can use to protect your self against inflation as well.

If your not a fan of treasuries then you can choose to invest in bonds of highly rated multinational corporations with a very healthy balance sheet, preferably companies with a huge cash pile, they would be the least influenced by a credit crunch. However even these companies would suffer unless investors deem governments unable to pay back their debt, which in that case they might flock to these bonds for safety.

Gold

Traditionally gold has also served as a safe haven and a hedge against inflation. It is essentially a currency that cannot be manipulated by the interest rate policies of any one government.

More advanced options (only for the experienced)

In a 401k you can't short sell directly or take a margin position so you are limited with this account. You are still able to hedge by going long on put options.

However with your personal account you can use more complicated trades. I won't go into heavy detail as they should only be reserved for more experienced investors. If your interested I suggest reading up on synthetic positions


In conclusion: You have a few options but regardless of what you choose there is some sort of risk in all, depending on what you believe. Now with that said I am not in the camp to believe a catastrophic financial collapse is just over the hill, so I am more inclined to say depending on your investment goals I would maintain a diversified portfolio in cash, bonds and gold.

Edit: I wanted to add, the only thing a banking crisis can guarantee is liquidity issues, so the safest asset would be the most liquid asset or what would be perceived as the most liquid. Inflation wouldn't be the result of a banking crisis directly, instead it could be the result of the actions from what The Fed might or might not do during a banking crisis.

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Gold. Do a quick Google image search for graphs of the 'inflation-adjusted price of gold'. Over time it goes up and time and down by very large amounts. If we went back to circa-2000's gold prices, you could lose 75% of your principal. Now, going forward, gold may or may not be profitable, but that's another matter altogether. It may also play a role as an inflation and financial-catastrophe hedge. But it is very important to understand that gold is not a low-risk investment and you don't acknowledge that in your answer at all, so I am downvoting it for now. –  fennec Jul 10 '12 at 22:57
    
@fennec I state "there is some sort of risk in all, depending on what you believe". I also didnt advocate it as a good investment. I only proposed it as a possible hedge against a banking crisis/inflation. If we looked at gold from 2000-Now you would have a substantial gain not a 75% loss. If you meant from 1980 to 2000, the reason gold was so high in 1980 was because inflation in most countries at the the time was running in double digits, as well as other geopolitical factors. Which only furthers my point that "Traditionally gold has also served as a safe haven and a hedge against inflation" –  Kirill Fuchs Jul 10 '12 at 23:22
    
@fennec In addition the 'inflation-adjusted price of gold' can be counted more then one way and can be argued day and night. You can find calculations which make a case anywhere from 1500-2000. Regardless, in my answer I explain "I will assume your accessing your retirement account already" (I make this assumption because of the age listed on his profile). If a banking crisis occurred and led to inflation then yes gold would be a possible valid safe haven. –  Kirill Fuchs Jul 10 '12 at 23:34
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Gold's traditional role of "safety" has been challenged by recent price movements. To call an instrument an unqualified 'inflation hedge' while neglecting to mention its wild price swings is an incredible omission, especially when the questioner is seeking safety. Historically, inflation risk's got nothing on those kinds of price movements. Bottom line: gold is highly speculative and exposes you to risk, and you do the questioner an incredible disservice by failing to even mention this in passing in your advice. –  fennec Jul 10 '12 at 23:43
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P.S. I'm not saying "gold is an inappropriate investment for someone concerned with a financial crisis, stay away, don't recommend it ever." I'm just saying that when you recommend it, you should identify some real risks that people face, e.g. "it will hedge against a crisis but you will also be exposed to other risks and you should be comfortable with the possibility of losing significant amounts of principal before investing in it." Especially when you're putting it right next to cash and TIPS, where you face very low risks to your principal. –  fennec Jul 10 '12 at 23:52

I'm going to take a broader view on your question, on the assumption that you're NOT anywhere near retirement (the answer is totally different if you're 5 or even 10 years from retirement).

The safest thing you can do is ... drumroll ... have a diversified, balanced portfolio of stocks, bonds and cash instruments.

Not the answer you were looking for, huh? Look, like the others mentioned, savings accounts are FDIC insured. But, that's not the only risk you face. 401(k)s are for retirement, so they have to do two more things: 1) keep up with inflation, and 2) grow. A savings account, or any other "safe" investment, will do neither. In other words, if you keep it in a savings account, then in retirement dollar-for-buying-stuff-at-the-store dollar, YOU WILL GUARANTEE YOUR LOSSES.

Look back over the worst possible investment era's in the US: 1930-45, 1971-81, and 2000-now, and what do you find? A sensible portfolio of stocks and bonds, diversified and rebalanced, across any 40 years worth of saving for retirement, including those bad years, and you do ok -- even if you retire in the worst possible year.

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Your assuming there will be inflation... During the great depression in 1930 it was a period of deflation and if you had your cash under the mattress that was your best bet, not a diversified portfolio. Even after leaving the "gold standard" - deflation is still possible as seen in 2008-2009. –  Kirill Fuchs Jul 10 '12 at 19:30
    
deflation is a very rare thing, which almost inevitably will be followed by relatively increased inflation. –  littleadv Jul 10 '12 at 19:33
    
@KirillFuchs yes, but would you have know that that was going to happen before it happened? –  Patches Jul 10 '12 at 19:33
    
@littleadv Yes that is correct, especially with tools the Fed has today vs 1930. –  Kirill Fuchs Jul 10 '12 at 19:51
    
@KirillFuchs Thats why you have a diversified portfolio of stocks & bonds. The bonds do well during deflation. But that's not the point. There was some deflation in the '30's, and if all you look at was the '30's, it would look like investing sucked. I'm pointing out that investing for retirement isn't a 1, 3, 5, or 10 endeavor; it's a 40+ year endeavor. And there's no 40 year period in US history, esp. in modern history, where a diversified portfolio of stocks & bonds didn't build you at least a mediocre retirement. If you stick your money in a savings account instead, it's catfood time. –  Patches Jul 24 '12 at 18:50

Assuming you're in the US, the safest place to invest your 401(k) funds, bar none, is a bank account. (You would need to make sure that it's a 401(k) account and a FDIC insured bank account. I'm pretty sure these exist.) This account could be in the form of a savings account, or a Certificate of Deposit. (If you choose a CD, be aware of the restrictions on when you can redeem it without penality.)

It doesn't matter if the bank fails because you will be protected up to $250,000 by federal deposit insurance - the bank's shareholders will be stuck with a worthless bank, but you won't lose a dime. If you have more than $250,000, use two (or more) banks. Note that this safety comes at a cost. You will make very little interest on your savings. Its purchasing power may be eroded over time by inflation.

An alternative rather-safe place to store your money which will avoid inflation risk is Treasury Inflation-Protected Securities (TIPS). These are a type of bond issued by the US government which will pay you based on the Federal Reserve's Consumer Price Index, as well as a certain level of interest. Note that if you buy this type of bond, you will be subject to interest rate risk: in an inflation scenario, it is plausible that bond yields will increase, which means bonds' face value will decrease, and if you have to sell them before their maturity you may realize a loss. This will also be the case if you buy a TIPS mutual fund or exchange-traded fund. However, if you hold the bond to maturity, you will not realize any loss.

I don't think either of these are good ideas for most people, at least not for all your 401(k) portfolio, but it does make sense for some portion of your portfolio if you are approaching retirement or in retirement and you expect to spend the money that you place in either of those instruments (bonds or bank accounts) within the next several years.

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