I wrote this article on November 3, 2011 on my Golden Valley Patch Blog.
A common question I get from the Minnesota company 401(k) retirement plan participants that I meet with has to do with how the mutual funds they own in their company retirement plans perform during a stock market decline.
The majority of company 401(k) retirement plan participants think that because all mutual funds are professionally managed, there is a built in risk management strategy in how the mutual fund is managed.
Many of these company retirement plan participants think that their mutual funds have a game plan to protect their retirement plan account values when the stock markets begin to decline in a big way.
Not true. The mutual fund companies that manage your company retirement plan account mutual funds don’t manage stock market risk. They never have and they never will.
You will never see a mutual fund manager sell stocks in their mutual fund in the early stages of a stock market decline. You will never see a mutual fund manager maintain a large money market balance in order to preserve the value of their mutual fund shares in a declining stock market environment.
Mutual fund companies and mutual fund managers are both compensated by the amount of money that is invested in their mutual funds. The total dollar amount of money invested in their mutual fund, multiplied by a percentage of that money, is how mutual funds and mutual fund managers are paid.
The investment theme of “buy-and-hold” through all economic and stock market cycles originated in the mutual fund industry. Mutual fund managers never think about taking a “defensive” position in their mutual funds because if they did, their mutual fund company revenues and their individual compensation would decline.
When the stock market goes down again, like it has several times in the last few months, mutual fund managers lose money, and the price of their mutual funds share drop in value. The only problem is, the money that they lose is your company 401(k) account money invested in their mutual funds.
As every Minnesota company retirement plan participant is painfully aware, remaining fully invested in the stock market at all times is often not in your financial best interest. Stocks markets drop very quickly, and have taken several years to recover those short-term losses.
The amount of risk you take owning mutual funds in your company retirement account is always up to you. Don’t ever count on the mutual fund company or the mutual fund manager to take the necessary steps to preserve your company retirement plan principal. They don’t manage your money that way.
Ric Lager
Lager & Company, Inc.
