Even casual investors have read an article about the merits of diversification. More than one. It is one of the most repeated financial services provider advertisement themes.
If not, your 401(k) provider web site would be more than happy to help. They could fill up the rest of your day with diversification topics. Strategies, resources, and online tools to help you get started.
Both stocks and bonds have performed poorly in 2022. The standard 60% stock 40% bond portfolio has posted one of its worst showings in years. That is leading many 401(k) investors to wonder. How can they better protect their 401(k) portfolios against stock and bond market losses in 2023?
The first problem with diversification efforts recently has been bonds. Inflation has been a killer. The Federal Reserve has been hiking interest rates. To get inflation under control.
In 2022, there were six increases in the fed-funds rate. Totaling 375 basis points. In plain language, that is 3.75%.
Long-term bond investments lost less money than stocks in 2022. But bond mutual fund investments did not provide as much of a cushion as they usually do. And the popular target term mutual funds found on most default 401(k0 menus did not fare much better.
The reality is clear. The relationship between stocks and bonds has undergone a dramatic secular change. 401(k) investors need to adjust their risk tolerance and investment objectives.
For the last three or four decades interest rates trended down. In 2022, that trend reversed. In a big way. The correlations between stocks and bonds moved from negative to positive. And 401(k) investor principal losses followed.
401(k) investors receive less diversification from bonds. If the inflation rate does not fall, there will be continued interest-rate hikes. And bond mutual funds will continue to lose more principal value in the future.
The mutual funds where 401(k) investors look to for diversification have not done well. Last year there were significant principal losses. Across the board in U.S. stocks, international stocks, and bond mutual funds.
The best asset class to preserve you 401(k) principal has been the money market fund.
In most years, the money market account is a poor investment in a 401(k) Not now. And not going forward.
Do not feel overwhelmed by the 401(k) investment management responsibilities. Right now, your number one goal in managing your 401(k) is clear.
Preservation of principal. Do not lose any more money with a “buy-and-hold” 401(k) investment management strategy. Set-it-and-forget-it has failed once again. Like it has every few years.
Ric Lager
Lager & Company, Inc.
