This time last year, the bond mutual funds were promoted as a great place to invest part of your Minnesota company 401(k) retirement plan account.
The financial experts predicted that interest rates would remain stable in 2013. They also advised you to refinance your home at the record low interest rates.
Like many investment predictions, things did not turn out as planned. Interest rates rose dramatically in 2013. Bond mutual fund prices fell as a result. The largest mortgage companies in the U.S. fired thousands of workers.
In 2013 the investment performance of strategic asset allocation also failed. The financial industry sales pitch to always be “diversified” cost company 401(k) retirement plan participants dearly.
If you own any mutual fund investment at the wrong time, it can cost you tens of thousands of dollars. In 2013, bond mutual funds dragged down your company 401(k) retirement plan account investment returns.
Investment management strategy needs to be grounded in common sense. In 2013, interest rates were near the lowest levels in U.S. history. Did any financial advisor warn their individual investor client as to what happens to bond mutual fund prices when interest rates go up?
Many times the ability to “make money” in your company 401(k) retirement plan account comes not the investments you own. Instead it comes from the investments you don’t own.
A 100% stock market investment strategy is too aggressive for many older investors. In 2013, owning U.S. stocks was more conservative than owning any bond mutual funds.
The strategic asset allocation story of diversification is sold to individual investors in order to keep them fully invested at all times. It makes much more common investment management sense to only own investments that are rising in value.
The investment management lesson of 2013 is the answer to the following question. Do you invest to diversify? Or do you invest to grow and protect your investment account value?
Bond mutual funds are not appropriate investments when interest rates are rising. Not for the sake of diversification. And not because a financial advisor with a computer generated pie chart told you to diversify.
Ric Lager
Lager & Company, Inc.
