Posted June 29, 2009
Adverse to Risky Investments? Make Sure Your Investments are Really Safe
It is no big surprise that many Americans saving for retirement
have become averse to risk lately. Indeed, study after study shows
that Americans are investing less and less of their money in
so-called risky assets (stocks) and more and more in what they view
as safe assets, including stable value funds.
Stable value funds, according to the Stable Value Investment Association, are capital preservation investment options typically available in 401(k) plans and other types of savings plans. "They are invested in a high-quality, diversified fixed-income portfolio that is protected against interest rate volatility by contracts from banks and insurance companies. Stable value funds are designed to preserve capital while providing steady, positive returns. Stable value funds are considered a conservative and low-risk investment compared to other investments offered in 401(k) plans." Learn more about stable value funds.
However, financial planning firms and financial planners are quick to note that even the 'safest' investments such as stable value funds carry — in today's unpredictable market environment — considerable risks that plan sponsors and participants alike might not be aware of.
According to experts at Watson Wyatt, stable value funds invest in fixed-income securities that are protected up to the amount of their book value by 'wrap contracts' issued by insurance companies and banks. "This protection is partly the reason stable value funds have long been considered among the most secure investments participants can make in their 401(k) accounts," according to a Watson Wyatt release. However, Watson Wyatt noted that the recent market turmoil has affected both the underlying investments as well as their guarantees. There are, according to Watson Wyatt, "two major areas of concern: the loss of book value of investments due to credit rating deterioration in the wrap issuer structure, and wrap issuers exiting contracts, which could drive the fund's crediting rate rapidly lower."
"Now more than ever, caveat emptor is the best advice any investor can follow," said FPA member, Joseph R. Hearn, vice president at Teckmeyer Financial Services, LLC. "Many financial products have gotten so much more complex than plain vanilla stocks and bonds. So, whether it's an "AAA" rated mortgage-backed security, auction-rate securities, credit default swaps, or stable value funds, it's not your father's Oldsmobile."
What's more, Hearn said you should avoid equating stable value funds with another investment often viewed as safe — money market mutual funds. A money market is quite different from stable value funds according to Hearn. "The ins and outs (of stable value funds) are hard to explain so advisers need to be careful not to dumb down their explanations. For example, it's easy for an adviser to say that a stable value fund is like a money market mutual fund because the client likely knows what a money market is. Unfortunately it doesn't tell the whole story."
FPA member, Joel A. Larsen, CFP®, of Navigator Financial Advisors, LLC said his tendency is to use money market mutual funds and not stable value funds for a "safe" investment. Money market mutual funds were not as safe as anticipated during the market turmoil last year. However, the Securities and Exchange Commission (SEC) has just proposed new rules to make those investments safer in the years to come. Learn more about money market mutual funds from the Investment Company Institute Web site. Learn more about the SEC's proposed rules to strengthen the regulatory framework for money market funds.
You may want to consult with a financial planner to help you invest your money wisely. Find a financial planner.
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