The dramatic decline of the U.S. stock markets over the last two weeks has grabbed most of your attention. Every individual company 401(k) retirement plan participant should be keeping a close watch on their stock mutual funds.
While you are at it, you might want to take a look your company 401(k) retirement plan mutual funds that are fully or partially invested in bonds.
Here is a quick economics lesson reminder. When interest rates rise, bond prices automatically decline. More importantly, bond mutual funds lose money. This is a law in the money management universe.
A few months ago, a 10-year U.S. Government Treasury bond was yielding 2.75%. Today, it is yielding about 3.10%. Bonds issued going forward are worth more because they offer higher yields. Bonds issued in the past are worth less because they offer lower yields.
Your company 401(k) retirement plan bond mutual fund prices have fallen dramatically over the last few months. And the U.S. Federal Reserve has widely advertised their intention to raise interest rates even higher later this year.
Morningstar is one of the best mutual fund databases around. Only investment professionals can afford to pay for it each month. According to an investment performance search I conducted early this week, nearly all bond mutual funds are down in value so far in 2018.
The U.S. stock market have only declined recently about the same percentage as many bond mutual funds have declined this year.
Most individual investors see the word “bond” in a mutual fund description and think they are safe. The same goes with the words “balanced” or “allocation” found in many mutual fund names.
The safety of any bond mutual fund is at risk right now. The more of your company 401(k) retirement plan money you have invested in bond mutual funds now the more money you will lose going forward due to rising interest rates.
For the last several years, target term or target date mutual funds have been the most popular company 401(k) retirement plan menu mutual fund option. These funds are loaded with bonds; especially longer-term bonds that go down in value the most when interest rates rise.
When interest rates rise, and stock markets fall, there is truly nowhere to hide for individual company 401(k) retirement plan participants. The only investment management decision to make is how much risk you are willing to take going forward.
Your October company 401(k) retirement plan statement is going to look much different than the September statement. In fact, the drop in your company 401(k) value over the last two months might be the biggest scare you get this Halloween.
Ric Lager
Lager & Company, Inc.
