When I talk to individual Minnesota company 401(k) retirement plan participants, I often find a good understanding of how the stock market is doing. Unfortunately, those same individual investors have no clue about the status of world interest rates.
Individual investors don’t follow interest rates closely. They don’t fully understand how dramatic changes in interest rates can affect the value bond mutual funds. And they have no idea how much their company 401(k) retirement plan accounts are at risk.
You can’t really blame individual investors. The U.S. Federal Reserve has held the Fed Funds rate at 0% for over six years. There is an entire generation of company 401(k) retirement plan participants who have never seen interest rates rise. Their bond and “balanced” mutual funds have only gone up in value since they have owned them.
Most company 401(k) retirement plan investors have bought into the “buy-and-hold” and “diversification” investment management themes. Both have worked well over the last few years.
Now is the time for a major company 401(k) retirement plan account investment management decision. Do you want to remain diversified, or do you want to protect the last several years of your bond mutual fund investment gains?
Interest rates have risen dramatically over the last few weeks. The traders around the world who trade bonds for a living have taken the price of bonds down over the last few weeks.
When U.S. interest rates rise, the prices of bond mutual funds fall. There is nowhere for bond mutual fund managers to hide. Bond and balanced mutual funds in your company 401(k) retirement plan account have dropped in price recently due to this rise in interest rates around the world.
Successful long-term company 401(k) retirement plan account investing is all about making investment management changes as stock and bond market conditions change. You don’t need to anticipate changes; that is market timing. But common sense states that when the investment climate changes, individual investors need to adjust.
U.S. interest rates may be changing their long-term trend. If the rise in interest rates continues, you need to take steps to preserve your company 401(k) retirement plan principal.
Take an inventory now of how much of your company 401(k) retirement plan account is invested in bond and balanced mutual funds. If you are not comfortable with a large exposure to bonds, sell some of your existing bond mutual fund shares. Place the proceeds in the safety of your company 401(k) retirement plan money market account.
The long-term investment gains from your company 401(k) retirement plan bond mutual funds don’t mean anything unless you protect all or part of them when interest rates rise.
Ric Lager
Lager & Company, Inc.
