Individual company 401(k) retirement plan participants spend all of their time worrying about the stock market. Working investors hope and pray that trend the stock market trend of the last seven years continues.
I have never sat in front of a company 401(k) retirement plan participant who voiced a similar concern about a change in the direction of interest rates.
Many individual company 401(k) retirement plan participants have as much or more company 401(k) retirement plan account principal exposure when interest rates rise as compared to when the stock market falls.
Look at your most recent company 401(k) retirement plan statement. Can you easily identify the bond mutual funds? What are often harder to identify are the mutual funds that are partially invested in bonds.
Interest rates have been at zero for several years. Investors have become accustomed to bond prices always going up because rates have been stable for more than a decade.
Bond mutual funds have done so well for so long that my concern is that individual company 401(k) retirement plan participants have forgotten what happens when interest rates rise.
What do you think that the next big move in interest rates will be?
The value of bond mutual funds moves in the inverse direction of interest rates. If interest rates go up, your bonds and bond funds automatically go down in price. When rates go down, the value of bonds and the funds that hold them automatically rises.
When the Federal Reserve raises interest rates, the value of bonds and bond funds will automatically drop.
I don’t have a crystal ball that will tell you the timing of when the Federal Reserve finally raises interest rates. I can tell you that the bond mutual fund holdings of my current company 401(k) advice clients are going to be protected when it happens.
Ric Lager
Lager & Company, Inc.
