stable value funds

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datamonkee
Posts: 59
Joined: Wed Sep 07, 2011 10:40 pm

stable value funds

Post by datamonkee » Thu Oct 20, 2016 9:38 am

my 401k does not have a money market or cash fund. the closest thing it has is a "stable value fund." It seems that these funds seem to own "promises to pay interest" by insurance and other finance companies. It seems a little fishy to me.

How risky are these funds? for example, during an event like the 2008 crash, do these funds hold their value well? how likely is that these things will lose money?

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: stable value funds

Post by dbr » Thu Oct 20, 2016 9:51 am

In Larry Swedroe's book on alternative investments featuring the good, the flawed, the bad, and the ugly, SV funds are placed in the good.

There is a good discussion here: https://www.bogleheads.org/wiki/Stable_value_fund

If you want a lot more reading you can just look here: https://www.google.com/#q=stable+value+funds

My guess is that a very large number of people on this forum have some money in a stable value fund in their 401K. I used to have some money there but my plan deleted the SV option because they decided the fees in the fund were too high. They have replaced it with a generic intermediate bond fund.

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Taylor Larimore
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Re: stable value funds

Post by Taylor Larimore » Thu Oct 20, 2016 10:01 am

datamonkee wrote:my 401k does not have a money market or cash fund. the closest thing it has is a "stable value fund." It seems that these funds seem to own "promises to pay interest" by insurance and other finance companies. It seems a little fishy to me.

How risky are these funds? for example, during an event like the 2008 crash, do these funds hold their value well? how likely is that these things will lose money?

datamonkee:

Our wiki has a good description of "stable value funds." Use this link:

https://www.bogleheads.org/wiki/Stable_value_fund

This is a link to the Stable Value Investment Association:

http://stablevalue.org/media/misc/Stable_Value_FAQ.pdf

Stable value funds can be a substitute for relatively safe fixed-income securities in a portfolio which are used to limit portfolio risk.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

datamonkee
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Joined: Wed Sep 07, 2011 10:40 pm

Re: stable value funds

Post by datamonkee » Thu Oct 20, 2016 10:07 am

you guys are awesome. Thanks!

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avenger
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Re: stable value funds

Post by avenger » Tue Oct 25, 2016 1:06 pm

datamonkee wrote:you guys are awesome. Thanks!


My stable value fund is backed by two separate insurance companies and is paying 3%. So I felt it was a good subsittte for a bond fund.

I put half of my fixed income allocation into this fund, the other half being in total bond market index.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

datamonkee
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Joined: Wed Sep 07, 2011 10:40 pm

Re: stable value funds

Post by datamonkee » Wed Oct 26, 2016 9:29 am

Isn't that highly risky? what If one of the insurance companies fails like lehmann?

i was reading that insurance companies with GICs have failed back in the 90s

Hogan773
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Re: stable value funds

Post by Hogan773 » Wed Oct 26, 2016 10:43 am

datamonkee wrote:Isn't that highly risky? what If one of the insurance companies fails like lehmann?

i was reading that insurance companies with GICs have failed back in the 90s


I believe the insurance companies only guarantee the return, but there should be underlying assets too. So if the underlying asset value declines, the insurance company would kick in to top up and ensure that 3% return. So if the insurance company failed, you wouldn't have someone there to do that top up, and you could be subject to not getting that 3% return or even a decline in principal depending on the underlying assets, but it's not as if you lose it all because the insurance company failed.

Stonebr
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Location: Maine

Re: stable value funds

Post by Stonebr » Wed Oct 26, 2016 3:15 pm

datamonkee wrote:Isn't that highly risky? what If one of the insurance companies fails like lehmann?

i was reading that insurance companies with GICs have failed back in the 90s


As a result of the failure of Mutual Benefit in the early 90s, much of the GIC market converted to a form called synthetic GICs or separate account GICs. These hold a pool of assets (bonds and mortgage backed securities) in a portfolio that is legally separate from the insurer and in the hands of a third party -- usually a trust bank. The insurer provides the guarantee of the interest rate and the investment management, either from their own investment department or an outside firm. However, there are still some simple GICs that are invested directly in the general account of insurance companies. These are as safe as the insurer. My own 401k stable value account is invested in a blend of all these types of GIC. I've been using it since 1982 and don't plan on changing any time soon.

The primary regulator of insurance companies is the New York State Insurance Department. You might want to make sure that your stable value account invests only in insurance contracts from companies licensed to do business in New York.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

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