The Mayo Clinic web site states that a stress test gathers information about how your heart works during physical activity. Exercise makes your heart pump harder and faster than usual. That exercise stress can reveal problems within your heart that might not the noticeable otherwise.
It’s time for the same kind of a stress test for your company 401(k) retirement plan account. You need to get an idea of how your company 401(k) retirement plan account will react when interest rates rise and stock market prices fall.
There are few reliable tools for stock and bond market stress tests. Historical context is useful. How much money did you lose in your company 401(k) retirement plan account from the summer of 2008 to the spring of 2009?
Balanced mutual funds declined by about 25% during that time period. Many stock mutual funds declined 40% or more. International stock mutual funds declined more than 50%.
It is time to learn from your past company 401(k) retirement plan account investment management mistakes. The main part of your investment strategy now should be to not to repeat those events.
It is not the stock and bond market gains that get you closer to a safe retirement. Instead, it is the preservation of those stock and bond market gains that get you closer to a safe retirement.
Dramatic company 401(k) retirement plan account losses can cause your heart to pump harder and faster than usual. Stock and bond market declines can provide you with its own kind of physical stress test.
The same goes for the bond mutual funds that you currently own. No one can predict the timing and severity of a potential Federal Reserve interest rate increase. I will warn you that there is no road map to unwind the historical low interest rates orchestrated by the Federal Reserve over the last few years.
Now is the time to know what kind of bond mutual funds you currently own. More importantly, you need to know how that bond mutual fund is likely to act when interest rates rise.
Stocks will fall from their current all-time highs. Interest rates will rise from their current all-time lows. Both events can wipe away the last several years of your company 401(k) retirement plan investment gains.
Make sure that you can live with the results from your company 401(k) retirement plan account stress test. You don’t have to give back all that you have gained.
Ric Lager
Lager & Company, Inc.
