In the last few months the U.S. stock market advance has dominated the headlines. Even individual investors who typically don’t pay any attention to their company 401(k) retirement plan accounts have noticed their all-time high statement values.
It’s human nature to get excited about a rising stock market. It’s my job as a professional investment advisor to make sure that my individual company 401(k) advice clients also pay attention to the other side of their retirement plan investments.
That other side is bonds. Target date mutual funds are one of the most popular company 401(k) retirement plan investment options today. A large part of target date mutual fund money is invested in bonds.
Bond prices have been falling since the late Fall of 2017. There is no doubt that bond prices will continue to fall as the new year of 2018 moves along. Your recent company 401(k) retirement plan account stock market gains are at risk as U.S. interest rates continue to rise.
Most individual company 401(k) retirement plan participants don’t’ understand, or remember, that bond prices fall as interest rates rise. Bonds that were purchased in the past at lower interest rates fall in price as new bonds are issued at higher interest rates.
It is always hard to call the U.S. stock market top. All that you have to do to call a top in bond prices is pay close attention to the actions of the U.S. Federal Reserve.
The Federal Reserve has stated publicly on several occasions over the last few months their intention to continue to raise interest rates. The new Federal Reserve Chairman Jerome Powell intends to follow the same rising interest rate strategy as the former Federal Reserve Chairman Janet Yellen.
One of the oldest and wisest sayings on Wall Street is, “Don’t fight the Fed.” The investment strategy is that when the Federal Reserve cuts interest rates, you should buy stocks.
Conversely, what should you do if the Federal Reserve has already begun to raise interest rates, and intends to continue to raise them? I will give you three guesses; the first two don’t count.
It’s great to make money owning your company 401(k) retirement plan stock mutual funds. It makes no sense to lose some of those investment gains owning company 401(k) retirement plan bond mutual funds when interest rates are rising.
Take the time to calculate how much bond exposure you have now in your individual company 401(k) retirement plan account. Don’t risk losing money on your bond mutual funds just because you did not pay attention to rising U.S. interest rates.
Ric Lager
Lager & Company, Inc.
