Over my 30 years as a Minnesota investment advisor, I have sat down in front of hundreds of individual investors. By far, the biggest misconception is the belief that mutual fund managers will protect their mutual fund shareholders from stock and bond market risk.
Nowhere is the misunderstanding greater than with individual company 401(k) retirement plan participants.
Mutual funds do not protect individual investors from rising interest rates or a falling stock market. A review of historical stock and bond market cycles reveals just the opposite.
The job of the mutual fund manager is to remain 100% invested at all times. Mutual fund managers are incentivized to “outperform” the popular stock market averages. The fee revenue of the mutual fund company, and his or her annual bonus, resides in that fact of business life.
Let’s say that the S&P 500 drops 30%, and the company 401(k) retirement plan large cap mutual fund that you own drops 25%. In that case, the large cap mutual fund manager is going to get an annual performance bonus.
Bond mutual funds that are found on your company 401(k) retirement plan menu operate in the same way. When interest rates rise, the investment management goal of the bond mutual fund manager is to not lose as much money as the popular interest rate indices.
You deserve better investment management decisions in your company 401(k) retirement plan account. It makes no sense to ride the stock and bond markets to all-time account balance highs, and then lose the majority of all those years of investment gains during the next great downturn.
Remember 2008-2009? How well did your company 401(k) retirement plan mutual fund managers perform during the last great stock market decline? Even scarier is that the current generation of bond mutual fund managers has likely never had to manage a rising interest rate environment.
The investment management decisions that are required to protect your company 401(k) retirement plan mutual fund investment gains can only be found in two places.
First, you can monitor the popular stock market averages and interest rate levels yourself. When you have given up too much of your hard earned gains, you can sell all or part of your mutual funds in order to protect your company 401(k) retirement plan account principal.
The second option would be to seek out an investment advice relationship with an independent investment advisor. More and more of these advisors are adding company 401(k) retirement plan account investment advice to their product mix.
You will not get the company 401(k) retirement plan mutual fund manager to protect you from a falling stock market or rising interest rates. That is not how mutual funds work. You need to be the one to protect your company 401(k) retirement plan account.
Ric Lager
Lager & Company, Inc.
