Skip to main content

Part 3 - Time to be conservative with your 401K

Worried about your 401K? Should you be?

I have written two previous posts focused on being conservative in your 401K during these turbulent days in the stock market (read Part 1 or Part 2). The basic concept was that you should lighten up on stocks and allocate a larger percentage, as much as 50%, to a stable value fund. In this manner, you would be obtain somewhat higher interest rates than would be available from a money market fund or Treasury bond fund while preserving capital.

Now we have stories in the news about money market funds "breaking the buck" and it is causing many investors to wonder, not only about their money market funds, but also about how stable their stable value funds actually are. The concern is well-placed given that:
  1. Fannie Mae and Freddie Mac bonds (known as agency debt) are often found in stable value funds
  2. AIG is a major player in stable value funds and provides "wrap" contracts that protect against loss of principal for some 10% of all stable value fund assets across the industry.
We all know the government has essentially taken over all three entities, throwing stock markets worldwide into turmoil.

Thankfully, the government is still standing behind Fannie and Freddie's debt and that has been reassuring bond holders. So what about the AIG connection?

Today's Wall Street Journal attempts to calm investors fears. It goes on to explain:
"In stable-value wrap contracts, the fund assets are not held in the insurance company's general account. They're owned and controlled by the plan. And in stable-value funds that hold AIG wraps, AIG would typically be just one of many wrap providers. "If something were to happen to one of those wrap providers, it doesn't really change anything in the stable-value portfolio other than the manager has to decide to reallocate those dollars to a different wrap provider," says Kelli Hueler, CEO of Hueler Analytics."
This is reassuring but it does not imply that stable value funds are immune to the current financial environment. Interest rates can be expected to decline as fund managers opt for less risk and less return. As the journal says:
"With greater market risk, wrap providers may become more conservative and insist that stable-value funds' underlying portfolios have higher credit quality and liquidity, likely lowering returns."
In summary --

So it appears that stable value funds dodged another bullet. With returns likely to decrease, however, there may be less advantage to holding these investments when compared to lower yielding but ultra-conservative government bond funds that are also generally offered in many 401K plans.


Source: Money-Market, Similar Funds Appear Solid Amid Carnage

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…

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…