However, there is a danger if a portfolio is weighted too heavily in lower-yielding investments such as stable value funds. The investor risks being squeezed by inflation down the road. A retirement income that seems sufficient initially can gradually become inadequate as the years pass and inflation mounts.
Stable value funds are often compared to money market funds since both are similarly low-risk. Here's a look at historic returns for both. The 15-year annualized return for stable value funds as of March 2023 was 2.99%, according to the non-profit group Stable Value Investment Association (SVIA).
These funds package a portfolio of high-quality, short- to intermediate-duration bonds with an insurance “wrapper.” This wrap, provided by an insurance company or a bank, guarantees principal and accumulated interest regardless of what happens in the market. Also, plan advisors overwhelmingly recommend stable value.
Closed-end funds often sell at massive discounts to net asset value (NAV). In these cases, they're effectively worth more dead than alive! Another nice aspect of CEFs is that, unlike mutual funds, they can use debt leverage to juice their returns.
Interest rate Risk – Income received from a CEF may fluctuate significantly based on changes in interest rates. As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.
Should I Move my 401(k) to a Stable Value Fund? This depends on your risk tolerance, and how long you have until you retire. Stable value funds are ideal for investors nearing retirement. They are not designed for growth.
Fixed Income and Treasurys
Treasurys are considered to be virtually risk-free because they're backed by the full faith and credit of the U.S. government. Here's why they're valuable during market crashes: Low risk: Treasurys have minimal default risk, making them a reliable safe haven.
However, it is important to remember that rising rates also means eventually higher crediting rates for stable value products. For older retirement investors looking for capital preservation, stable value may offer shelter from market volatility while potentially providing an attractive income.
Participant withdrawals and transfers are freely permitted daily according to plan provisions. Stable value funds from The Standard provide participants with full book value liquidity for benefit payments (death, disability or retirement) and transfers to other investment options.
Stable value returns3 have also outpaced inflation in more than 85% of those rolling 5-year quarterly periods over that same 25-year span, with most of the underperformance owing largely to the post-pandemic spike in inflationary pressures that saw annualized rates of inflation exceeding 8% for much of 2022.
Examples of “competing funds” include money market funds, high quality short term bond funds, or other principal preservation options.
Investors choose stable value because of the reliable long-term returns it provides for the portion of their savings that they don't want to expose to significant risk. Stable value funds allow investors to earn returns similar to short or intermediate bond funds with lower volatility.
This asset class is generally invested in short-term U.S. government bonds and high-quality corporate bonds during an average span of two to four years. Compared with money market funds, stable value funds typically pay higher interest rates with less volatility due to insurance guarantees.
The Fund primarily consists of a diversified portfolio of Stable Value Investment Contracts (Investment Contracts) issued by life insurance companies, banks and other financial institutions, the performance of which may be predicated on underlying fixed income investments.
Where Should You Put Money in a Recession? In a recession, it's smart to preserve your capital by investing in safer assets, such as bonds, particularly government bonds, which can perform well during economic downturns.
Vanguard has been managing stable value since 1984. In that time, our stable value products have had solid performance thanks to our robust process of allocation and selection across highly diversified asset classes in the underlying strategies.
Diversify Your Portfolio
Having a diversified 401(k) of mutual funds or exchange-traded funds (ETFs) that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn.
Investing in stable value is subject to many similar risks of investing in fixed income, including, but not limited to, credit risk, default risk, interest rate risk, issuer risk, liquidity risk, manager risk, market risk, regulatory risk, and tax and accounting risk.
Fidelity has been managing stable value portfolios since 1986. Our stable, independent organizational structure provides the freedom to focus on the long-term success of our customers.
Generally, shareholders of CEFs must pay income taxes on the income and capital gains distributed to them. Each CEF will provide an IRS Form 1099 to its shareholders annually that summarizes the fund's distributions. When a shareholder sells shares of a CEF, the shareholder may realize either a taxable gain or a loss.
One of the most attractive features of closed-end funds for retirees is their potential for high yields. According to Selengut, many closed-end funds currently offer yields of around 10%, significantly higher than traditional fixed-income investments.
Fees — Closed-end funds typically have higher expenses and management fees than exchange-traded funds. In contrast, exchange-traded funds have a lower expense ratio than CEFs since they do not charge management fees. Transparency — CEFs are typically less transparent than ETFs.