What the Safe Part Of Your 401(k) Still Can, And Can't, Do

Ted

FYI: Investors have long taken comfort in the steady returns their bond funds have provided, particularly when stocks go on another of their gut-wrenching drops. But the safety blanket is getting more threadbare, a result of simple math. Bonds don't pay as much interest as they used to, following a decades-long drop in interest rates. That means bonds pay less in income and also raises the threat of a rise in interest rates. Higher rates mean prices for bonds, whether individual ones in your brokerage account or the ones in a bond fund you own, will fall because their payouts look less attractive than those of newly issued bonds.

Even though bond funds provide less cushion than before, they still are the best defense for a 401(k) account, fund managers say. Bond funds will still hold up better than stocks during downturns. And investors may be in need of some safety soon. U.S. stocks are more expensive relative to their earnings after more than tripling since early 2009, and Wall Street questions how much more they can rise without strong growth in profits. President Trump's promise to shake up the status quo could also mean big swings for stocks.
Regards,
Ted
http://bigstory.ap.org/article/f669cd236fa0432495631608bc0cde83/what-safe-part-your-401k-still-can-and-cant-do

Sven

I was invested through 1994 when Fed (Alan Greenspan) raised rates 6 times. Bond lost 3% that year, BUT all asset classes rocketed from 1995 to 2000 when tech bubble.

Remember that we have a very different Fed Chairman today, Janet Yellen. My opinion is that I don't anticipate 6 rate hikes this year. Thus I will continue to keep moderate % to bond - intermediate and high quality. Also stable value fund is a better choice than money market if you have access to it.

Chinfist

My bond exposure is mostly in funds that are invested in higher yield (which are less affected by interest rates), or have an unconstrained mandate (which can benefit from rising interest rates since they can move to negative duration). I also have multisector funds which will also make the bond allocation decisions. The rest of my "safe" money, at least in my 401k, is in a stable value fund. Although funds with higher yielding bonds are not completely safe, I am more concerned with interest rate risk than credit risk right now.