The first objective of company 401(k) retirement plan account participation is to make enough contributions in order to get the “free money” company matching feature each year.
The second objective is to grow the value of your company-matching contributions and personal contributions in order to preserve future purchasing power versus the annual rate of inflation.
Ten-year Treasuries now yield 0.70%. If U.S. Treasury rates fall to 0%, the total return from current interest rate levels would we only 1.4%.
Compare that investment return potential to the current 10-year inflation rate at around 1.64%.
Now is the time to “do the math” regarding your company 401(k) retirement plan account investments in bond mutual funds.
For generations, individual company 401(k) investors have been reminded of the long-term investment management benefits of a “balanced” account. Those accounts always included a significant amount of bond mutual fund investments.
Why would any company 401(k) retirement plan investor continue to hold a bond mutual fund in order to remain “balanced” if the odds for long-term investment performance are so lousy?
The over-sold and often-hyped concept of a “balanced” company 401(k) account is not going to bail you out of a bad bond mutual fund investment in the future. And now that I have your attention, the same warning can be issued for a “diversified” 401(k) investment strategy.
Even the most hardline promoters of diversification would be very hard pressed to explain how bond mutual funds at current interest rate levels would be able to overcome future rates of inflation or higher interest rates.
Bond mutual fund prices tend to decline in value right alongside meaningful stock market corrections. Bond prices also show meaningful declines when inflation rises.
With U.S. interest rates near historic low levels, any company 401(k) retirement plan bond mutual fund investor would have to possess monumental faith in order to continue to believe in the marketing concept of “diversification” in any way, shape or form.
The same statement can be made about the over-hyped mutual fund marketing strategy of a “balanced” company 401(k) account.
I caution you on the long-term investment management merits if you continue to “diversify” and “balance” your company 401(k) retirement plan account by owning a meaningful amount of bond mutual funds.
Instead, consider some degree of common investment management sense. Don’t try to defy the historic laws of how bond mutual funds react to higher inflation and rising interest rates.
If you are concerned about the current status of your bond mutual funds, just send me an e-mail. I would be happy to provide a third-party independent analysis.
Ric Lager
Lager & Company, Inc.
