Skip to main content

Stable value funds - the controversy continues

As markets began to tumble early last year I wrote a couple of posts advocating that workers put a sizable percentage of 401k investments into stable value funds.

This generated some debate as stable value funds are somewhat murky investments. It is difficult to find out exactly what investments are held within the funds and there was some fear regarding the fact that it had been common for these funds to hold Fannie Mae and Freddie Mac bonds, for example. Adding to the apprehension, AIG was one of the companies that was well known for providing insurance (known as a "wrap") for these funds in the event they are not able to generate promised returns and needed to make up the difference. Most investors remember when these companies were in the spotlight and eventually required government bailouts.

Despite all the worry, stable value funds have been quite stable during all the market turmoil of the last year or so. Except for one.

The Wall Street Journal recently wrote about an Invesco stable value fund that lost 1.7% of its value in December. The fund was managed on behalf of Lehman Brothers. This particular fund was hit by falling bond prices. The problem was that some of the insurance coverage or "wrap" ended after Lehman's abrupt mid-September bankruptcy filing. Apparently two of the seven arrangements were discontinued in the confusion surrounding the hurried collapse of Lehman.

So how bad was this? The investors in this stable value fund lost 1.7% of their returns but still received about 2% in gains. The loss, therefore, was minor compared to how much they might have lost in most any stock fund over the course of the last year.

Regardless of the limited amount of the loss, it has generated jitters among stable value fund investors. A few bloggers, like David Merkel of the Aleph Blog, suggest that this might be the "first crack in the foundation" and recommend that investors may want to consider switching to Treasury bond funds if those choices are available in their 401k. Merkel adds, however, that his purpose is not to scare investors out of stable value funds.

I came across an interesting item today that in a way supports stable value funds. In a press release from writer Barry J Dyke, he contends that 69.7% of funds in the $4.5 billion 401(k) Thrift Plan for the 22,000 Employees of the Federal Reserve System is invested in its Fixed Income Fund. This fund is exclusively invested in stable-value group annuity contracts from major U.S. life insurance companies. The fund has returned 5.8% while major stock averages have lost roughly 30%.

So if stable value is good enough for the Fed, is it good enough for the rest of us? I think it is indeed good enough but if you are looking for ultimate safety it won't hurt to allocate some of your 401k funds into Treasuries as well. I know I have.

Comments

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:


Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:


Results here were actually quite good and, to make things even better, the previous month was revised upward.

N…

Alert HQ has moved!

End of an era!

This site was started way back in 2006/2007 to showcase my blog posts and the Alert HQ buy signals and sell signals. Alert HQ grew to include other kinds of stock alerts including Swing Signals, Trend Busters, Trend Leaders, Cash Flow Kings and more.

In the meantime, I built a sister site, TradingStockAlerts.com and I started using some of the same Alert HQ content over there. As a result, I am discontinuing the Alert HQ data here at Trade-Radar.com

The good news, however, is that all the Alert HQ signals and stock screens are still completely free. In addition, the pages have been enhanced so that you can hover over a stock symbol and a small chart will pop up so you can get a quick look at the stock's recent price action. If you click on a symbol it will take you to a page with plenty of financial and technical analysis information (still free!) as well as a larger chart that you can play with in terms of adding or deleting indicators, moving averages, etc.

Click …