When world-wide interest rates have fallen to all-time low levels, it is very easy to lose sight of how much risk you are taking with the bond mutual funds in your company 401(k) retirement plan account.
The global bond markets are a disaster. There are now over 30 foreign countries with interest rates below zero. Government debt all around the world continues to grow each year. At the same time the world-wide economy is slowing down at an accelerating rate.
At some point, the high-yield bond corporate and government bond markets will correct. You don’t want to be the last individual company 401(k) retirement plan bond mutual fund investor to figure that out.
Much of the last Financial Crisis of late 2008 to early 2009 had its origin in the world’s bond markets. When the high-yield and lower rated “junk bonds” lost their luster, the large institutional mutual funds and hedge funds all headed for the door at the same time.
World-wide stocks followed. Company 401(k) accounts became 201(k) accounts in as little as nine months.
The investment management issue for individual company 401(k) retirement plan participants now is to become more aware of the kind of bonds you own in your bond mutual funds.
If you own any bond mutual fund that can be described as a “high yield bond fund,” the clock is ticking. Also include on that list any mutual fund described as “high income,” “international,” or “multi-strategy.”
I have seen several company 401(k) retirement plan mutual fund that currently own between 30-50% of their assets in bonds rated below B. In addition, these same mutual funds can own bonds that are classified as “unrated.”
When, not if, world-wide interest rates rise again, these bond mutual funds are the next big accident waiting to happen. If you add slowing world-wide economies to the list of upcoming events, you have even more potential stock and bond market losses.
High yield bond mutual fund managers will be unable to find buyers for their lower quality bonds when interest rates rise. That is not my opinion; that is an investment management fact.
Your bond mutual fund manager will not save your company 401(k) retirement plan bond mutual fund principal. Only you can.
Take the time to know your potential exposure to the next rise in world-wide interest rates. The information is available and updated every month online.
Ric Lager
Lager & Company, Inc.
