Regardless of age, investment experience, or interest in personal investing, every individual investor has read or heard about the merits of a “balanced” company 401(k) retirement plan account.
A “balanced” stock and bond market portfolio offered in target term mutual funds is among the most popular company 401(k) retirement plan investment mutual fund choice.
Here’s the investment management problem to consider now. The principal value of the standard balanced mutual fund of U.S. stocks and U.S. Treasury bonds is very likely at risk going forward.
Do you want to remain “balanced” because you read about that concept in the financial media? Or do you want to take the necessary investment management steps to preserve the value of your company 401(k) account?
The Federal Reserve policy over the last several years has been to flood the U.S. economy with money at basically zero borrowing costs. The result has been a dramatic expansion of stock market earnings multiples to increase significantly beyond their historical averages.
The popular target term mutual funds are no longer properly diversified. Those mutual funds that use the term “balance” in the description, are no longer balanced.
With the rise of the U.S. stock market averages to all-time high, balanced funds own a much higher percentage of stocks than are allowed in their prospectus of in the description of the mutual fund.
Next, we come to the recent dramatic rise in interest rates. From all-time low levels of the 10-year Treasury note at .52% last year, to a level of over 1.7% last week. That is a rise of over 300% in less than a year.
Conclusion: The value of the stocks owned in these mutual funds has gone up. At the same time, the value of the bonds owned in these mutual funds has gone down.
Remaining “balanced” is a great investment management theory. In a current volatile stock market and a record rise in interest rates, even professional mutual fund money managers are overwhelmed.
Remember that investment management strategy of a target term mutual fund on a company 401(k) mutual fund menu is built to follow a conservative, long-term asset allocation strategy.
Like all other aspects of our lives over the last year, the current stock and bond market environments don’t lend themselves to any conservative, text book defined asset allocation strategy.
Ric Lager
Lager & Company, Inc.
