In this economic climate, what can you do to shore up the value of your 401k and prevent further losses?
Under normal circumstances—i.e. five years ago—owning bonds or bond funds in a long-term portfolio was supposed to protect it from falling too much.
But, what if bonds fall as well? There is a valid concern that bonds will not hold their performance in the next few years.*
One way to preserve the value of your 401k is to hold stable value funds. It’s a good option for women in particular during bumpy times, given that we live longer and need to preserve our assets.
A stable value fund is a mutual fund that preserves capital by investing in high quality bonds—but is protected against interest rate volatility by contracts from insurance companies.
Translation: It’s VERY unlikely that a stable value fund will lose money.
The interest rate is lower than your typical bond fund, but higher than a money market. They are found in approximately half of all 401k and 529 plans. (Unfortunately, it is very difficult to buy a stable value fund outside of a 401k plan.)
What You Should Do…. If you hold 30% of your 401k in bonds, consider switching to 15% bonds and 15% stable value.
What You Should NOT Do…. Move all of your 401(k) holdings into a stable value fund. Currently these funds are earning approximately 2-3%, which is definitely not enough to sustain future growth in your portfolio when inflation kicks in.
Relax. Do you worry about how your retirement account is doing? Do you look?
* Inflation is at the lowest in over 50 years, and interest rates are not likely to increase until 2013. Once inflation starts to increase, the lower interest rate your bonds earn may not keep up with inflation, thereby causing negative returns in your portfolio overall.
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