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The Stable Value Fund: The Single Best Option You Should Know About To Avoid Disaster In Your Retire
By: Thomas Mullooly
Suppose that the market dropped 20% in one year (as it did in 2001 and again in
2002). You might have to spend the bulk of the next big move up in the market
just getting back to even, instead of making money. But suppose we were able to
walk away with a flat return...or just a small loss instead. Would you agree
that we’d be in much better shape heading into the next move up in the market,
if we could avoid “the big hit?”
Now, there used to be a time (throughout the 1980’s and 1990’s), that absorbing
just a small loss in a year where the market drops 20% would be called
“significant performance” compared to (or relative to) the rest of the market.
This is because folks in the market were more interested in “relative returns”
back then, not “absolute returns.”
The reason so many were interested in “relative” returns back then was because
throughout the ‘80’s and ‘90’s, we were barreling down the highway in a secular
bull market. Every pull back along the way was simply a terrific buying
opportunity. You were dubbed a hero if the market dropped 25% in one year and
you were able to lose only 10%.
Not so today!
We’re not interested in “relative” returns and neither should you. What we are
interested in is absolute returns.
The methods we use (a blend of fundamental analysis and point and figure
technical analysis) are not perfect every time. But they do an excellent job of
telling us when supply overtakes demand. This is true whether or not we are
looking at a particular mutual fund, an individual stock, a sector or the market
as a whole. Whenever supply overtakes demand, lower prices are certain to
follow. And we should take the steps needed to protect our retirement dollars at
that time.
Look, losing money impacts your returns for many years, not just one year.
That’s because if we have a year where we lose 20%, we’ll need to make 25% just
to get back to where we began. It’s really important that we do our very best to
avoid big losses in our account...whether that account is our regular brokerage
account, or our 401k account, or some other retirement plan.
So what do you do to avoid big losses when the market is crashing?
In 401k and other retirement accounts, we have a “safety valve” option which, if
used properly, allows us to sidestep much of the damage. It is often called the
“stable value” fund or the “stable income” fund.
The stable fund is often a guaranteed insurance contract (or “GIC”) that will
give you a safe place to park your money, out of the stock market. There are
millions of people (yes, millions) who have all of their money in their
retirement plans invested in the stable fund.
In 2005, many of the plans that we advised had stable funds that generated
yields in the neighborhood of 3% to 4% for the year. Listen: if you stayed in
the “stable fund” for all of 2005, you beat the entire Dow Jones Industrial
Average and the Standard & Poor’s 500 index.
But this is really not the goal of the stable fund.
The “stable fund” is an investment that really should be looked at as a “parking
place” or a temporary spot, to hold your funds while the market is going down,
or on defense.
In secular bull markets, we’d have little use for the “stable fund,” since we’d
want all of our funds invested all the time. But that is not the current
environment we have in 2006.
When the market begins to drop, we’ll often recommend that a certain percent of
your money go to the stable fund, instead of some other investment. This is
because it’s better to just stay out of the game than to take a risk, when
everything’s going to the dogs.
Sometimes we may recommend you have most of your money in the stable fund. It
really depends on your age, your tolerance to handle the fluctuations of the
market and where things are heading at that current time. If a new client comes
to us when the market is falling, it may take as long as four to six months to
get most of the money back into the market. It all depends on where the market
is at when we begin.
The stable fund is an instrument we can use to generate decent returns in an
otherwise bad market. Nobody’s perfect when it comes to investing, but making
use of the stable fund is a useful tool to have inside of a retirement plan. It
gives you more flexibility.
By the way, were you aware that close to 80% of all participants in 401k plans
(and other retirement plans as well) make their investment choices on the day
they join the plan...and then never change them again?
Since Social Security is a mess and pension plans are disappearing by the
minute, managing the returns in your 401K has never been more important.
About the Author:
Thomas Mullooly, President of Mullooly Asset Management, works one on one with
individuals so they can regain control of their investments. To learn how to
stop making simple investing mistakes and to sign up for Tom's email alerts,
visit www.mullooly.net, today! Or call Tom at 877.223.7300 to request to
see for yourself, in writing, how to manage the risk in your 401k plan. |
