The primary purpose of owning bonds in a company 401(k) account is to reduce the risk of stock market exposure. The 60/40 portfolio mindset is a huge part of the current individual 401(k) investor generation.
The most popular 401(k) option toady are target date mutual funds. These funds support the “balanced” investment strategy theory.
Like many things in life, the theory is sound. And it works. Until it does not.
Rising interest rates are beginning. The worst inflation in two generations is front page news every day.
Bond mutual funds are not reducing the risk in your 401(k). A convincing case to make now that owning any level of bonds is making your 401(k) account move backwards. When you factor in rising interest rates and raging inflation.
There is only one way out of the current bond mutual fund mess. Through a more active investment management approach to your 401(k).
Gone for now are the predictable years of dramatic growth of your 401(k). Remember all the past years when all you had to do was pick any growth mutual funds? Even the no-brainer index mutual fund option on your default 401(k) menu made you a lot of money each year.
The primary investment goal in your 401(k) now is the preservation of principal. That goal is best achieved by selling any lagging mutual funds you currently own.
The best alternative to owning a poor 401(k) mutual fund now is the money market account.
Any level of stock and bond market exposure now is of concern. Stop loss limits in dollars or percentages should be in place from current levels.
How is that mutual fund ranked versus your other 401(k) mutual fund options?
How much of that mutual fund invests in stocks? How much in bonds?
Only own the best mutual funds available to you. Avoid at all costs the worst mutual funds on your default 401(k) menu.Preserve the value of the largest part of your 401(k). With a stop loss you can live with. So, you do not have to worry about the current stock and bond market volatility.
Ric Lager
Lager & Company, Inc.
