One of the most dangerous assumptions in 401(k) investing.
Is also one of the most common.
“Diversify your 401(k) in stock and bond mutual funds.”
The last financial media bite you heard.
The online financial information web site you read last.
Did not mention inflation in their pearl of investment wisdom.
Owning a combination of stock and bond mutual funds.
Owning a popular 401(k) target date mutual fund.
Does not diversify your 401(k) principal risk.
Stock mutual funds intend to provide growth.
Bond mutual funds intend to provide safety.
The combination is textbook “diversification” of your 401(k).
Here’s the problem in your 401(k) mutual funds now.
Stock and bonds are responding to the same economic force.
One of the most dangerous and powerful forces in economics.
Inflation.
When inflation rates go up, interest rate tend to follow higher.
Rising interest rates mean lower bond prices.
Lower bond prices are bad for 401(k) bond mutual funds.
Bond mutual funds can’t provide 401(k) safety of principal.
When interest rates are rising.
At the same time stock prices are falling.
Your 401(k) bond mutual funds have no place to hide.
Right now in your 401(k).
Stock and bond mutual funds are both at risk.
Target date mutual funds are more exposed to that risk.
You are not diversified to investment management risk.
In your 401(k) mutual funds now.
You might diversify on paper or in mutual fund name.
But you are not diversified by 401(k) principal risk.
The financial media advertises bond mutual funds.
And every target date mutual fund in existence.
As the safe “diversification” for your 401(k).
Inflation has other ideas.
And inflation wins every time.
True investment management diversification.
Owns asset classes not correlated to each other.
In the same economic, stock market, or interest rate cycle.
You don’t have that luxury now in your 401(k) mutual funds.
Want a third-party look at your 401(k) mutual fund risk now?
Let’s connect and I can share your details.
P.S. Diversification does not hide 401(k) mutual fund principal risk.
