I wrote this article on March 30th, 2012 for my Golden Valley Patch Blog.
Earlier this month, I was a co-presenter at an investment advice seminar in Orange County, CA. A great group of investment professionals were in attendance; most of them with questions about how to provide better investment advice to their individual company retirement plan clients.
In the seminar, at the lunch and dinner table, and at the happy hour gathering, questions came my way about how to convert company retirement plan clients from “savers” into better long-term “investors” in their company retirement plan accounts.
These professional investment advisors I met with from all over the country all shared the same concerns about their clients. With the stock markets so volatile, interest rates so low, and the economic outlook so uncertain, the investment mindset of company 401(k) plan participants can best be describe as a combination of confused, frustrated and angry.
Millions of dollars of their client accounts was “scared out of the stock market” during the last big downturn. Since then, the economic news in regard to housing, jobs, and consumer spending has not calmed any individual investors managing their company retirement plan account.
Yet the stock market has risen dramatically in the last few months in spite of the list of individual company retirement plan participant concerns.
As experienced investment professionals, our group agreed that the traditional 60/40 mix of stock and bond mutual funds would prove to be disastrous for most company retirement plan participants in the future.
The majority of individual company retirement plan participants need to stop “saving” money in the bond mutual fund options in their company retirement plan account menus. When interest rates rise, bond mutual funds could fall in market value at a much faster pace than their current levels of yield.
What good is a current 4% investment return when that same mutual fund could lose 8-10% of its value when interest rates start to rise?
Bond mutual fund owners have “guessed right” in their dependence on bond mutual funds over the last few years. At some point in the future, those same guesses could be wrong in a big way.
Instead, individual company retirement plan participants need to get more comfortable “investing” in the best-performing mutual fund options in their company retirement plan account menus.
I am not saying that you need to sell the bond mutual funds you own today. I am also not making the case that you should reinvest all your company retirement plan account balance in stock mutual funds.
Investing in stock mutual funds is certainly not without risk. At all times, stock market and interest rate risks have to be managed.
I am saying that at the current stage of our nation’s economic recovery, an “investor” in stock mutual funds may have less risk than a typical buy-and-hold bond mutual fund “saver.”
Ric Lager
Lager & Company, Inc.
