new 401k with stable value fund...should I use it? for how much?

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Topic Author
panhead
Posts: 338
Joined: Fri Feb 22, 2013 10:53 am

new 401k with stable value fund...should I use it? for how much?

Post by panhead » Sun Sep 08, 2019 9:27 pm

Hi All, I started a new job and this company’s 401k has a stable value fund. It’s T Rowe Price Stable Value Common Trust B, it appears to have a yield of about 2.25% and an expense ratio of 0.25% so resulting actual yield is about 2.00%.

EDIT: It has been made clear to me below that 2.25% is AFTER taking into account expenses, so the net yield of the stable value fund is 2.25%.

This 401k also has Vanguard Total Bond Market Index Inst (VBTIX). This fund has an SEC yield of 2.20%. I plan on rolling my old 401k plan into this one, so I soon will have a sizable balance in this plan. I’ve never had a plan that had a stable value fund, so I’m trying to figure out how to best use it, if I should use it at all. I’ve done a search, but like often happens, I can’t find something specific enough to my own situation to really help, so I figured I’d ask for opinions here.

Let’s consider an example with simple numbers. Say you have:

Portfolio of $2M
50/50 portfolio of stock/fixed income
$400k muni bond fund in taxable (Vanguard intermediate term tax exempt (VWIUX)
$600k in the new 401k (after roll-ins) which has the stable value fund and VBTIX (Vanguard total bond inst)
You desire to maintain a 50/50 AA
You are in your early 50s
retirement as soon as 5 years away, to as far as 12.

What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
Last edited by panhead on Mon Sep 09, 2019 8:09 am, edited 1 time in total.

Outafter20
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Location: New York for now.

Re: new 401k with stable value fund...should I use it? for how much?

Post by Outafter20 » Sun Sep 08, 2019 9:29 pm

panhead wrote:
Sun Sep 08, 2019 9:27 pm
Hi All, I started a new job and this company’s 401k has a stable value fund. It’s T Rowe Price Stable Value Common Trust B, it appears to have a yield of about 2.25% and an expense ratio of 0.25% so resulting actual yield is about 2.00%. This 401k also has Vanguard Total Bond Market Index Inst (VBTIX). This fund has an SEC yield of 2.20%. I plan on rolling my old 401k plan into this one, so I soon will have a sizable balance in this plan. I’ve never had a plan that had a stable value fund, so I’m trying to figure out how to best use it, if I should use it at all. I’ve done a search, but like often happens, I can’t find something specific enough to my own situation to really help, so I figured I’d ask for opinions here.

Let’s consider an example with simple numbers. Say you have:

Portfolio of $2M
50/50 portfolio of stock/fixed income
$400k muni bond fund in taxable (Vanguard intermediate term tax exempt (VWIUX)
$600k in the new 401k (after roll-ins) which has the stable value fund and VBTIX (Vanguard total bond inst)
You desire to maintain a 50/50 AA
You are in your early 50s
retirement as soon as 5 years away, to as far as 12.

What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
I may be wrong, but I think the stated yield is after the E.R. is figured in.

Topic Author
panhead
Posts: 338
Joined: Fri Feb 22, 2013 10:53 am

Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Sun Sep 08, 2019 9:32 pm

Outafter20 wrote:
Sun Sep 08, 2019 9:29 pm
panhead wrote:
Sun Sep 08, 2019 9:27 pm
Hi All, I started a new job and this company’s 401k has a stable value fund. It’s T Rowe Price Stable Value Common Trust B, it appears to have a yield of about 2.25% and an expense ratio of 0.25% so resulting actual yield is about 2.00%. This 401k also has Vanguard Total Bond Market Index Inst (VBTIX). This fund has an SEC yield of 2.20%. I plan on rolling my old 401k plan into this one, so I soon will have a sizable balance in this plan. I’ve never had a plan that had a stable value fund, so I’m trying to figure out how to best use it, if I should use it at all. I’ve done a search, but like often happens, I can’t find something specific enough to my own situation to really help, so I figured I’d ask for opinions here.

Let’s consider an example with simple numbers. Say you have:

Portfolio of $2M
50/50 portfolio of stock/fixed income
$400k muni bond fund in taxable (Vanguard intermediate term tax exempt (VWIUX)
$600k in the new 401k (after roll-ins) which has the stable value fund and VBTIX (Vanguard total bond inst)
You desire to maintain a 50/50 AA
You are in your early 50s
retirement as soon as 5 years away, to as far as 12.

What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
I may be wrong, but I think the stated yield is after the E.R. is figured in.
The stable value fund doesn't list any kind of SEC yield, all I could find was a 1yr return. Since the price is stable at $1.00, the yield was $2.25. Since this is not an SEC yield, I don' think it would take into account the ER. It is basically a distribution yield.

MotoTrojan
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Re: new 401k with stable value fund...should I use it? for how much?

Post by MotoTrojan » Sun Sep 08, 2019 9:50 pm

panhead wrote:
Sun Sep 08, 2019 9:32 pm
Outafter20 wrote:
Sun Sep 08, 2019 9:29 pm
panhead wrote:
Sun Sep 08, 2019 9:27 pm
Hi All, I started a new job and this company’s 401k has a stable value fund. It’s T Rowe Price Stable Value Common Trust B, it appears to have a yield of about 2.25% and an expense ratio of 0.25% so resulting actual yield is about 2.00%. This 401k also has Vanguard Total Bond Market Index Inst (VBTIX). This fund has an SEC yield of 2.20%. I plan on rolling my old 401k plan into this one, so I soon will have a sizable balance in this plan. I’ve never had a plan that had a stable value fund, so I’m trying to figure out how to best use it, if I should use it at all. I’ve done a search, but like often happens, I can’t find something specific enough to my own situation to really help, so I figured I’d ask for opinions here.

Let’s consider an example with simple numbers. Say you have:

Portfolio of $2M
50/50 portfolio of stock/fixed income
$400k muni bond fund in taxable (Vanguard intermediate term tax exempt (VWIUX)
$600k in the new 401k (after roll-ins) which has the stable value fund and VBTIX (Vanguard total bond inst)
You desire to maintain a 50/50 AA
You are in your early 50s
retirement as soon as 5 years away, to as far as 12.

What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
I may be wrong, but I think the stated yield is after the E.R. is figured in.
The stable value fund doesn't list any kind of SEC yield, all I could find was a 1yr return. Since the price is stable at $1.00, the yield was $2.25. Since this is not an SEC yield, I don' think it would take into account the ER. It is basically a distribution yield.
1 year return should also include ER, no?

Topic Author
panhead
Posts: 338
Joined: Fri Feb 22, 2013 10:53 am

Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Sun Sep 08, 2019 9:54 pm

MotoTrojan wrote:
Sun Sep 08, 2019 9:50 pm
panhead wrote:
Sun Sep 08, 2019 9:32 pm
Outafter20 wrote:
Sun Sep 08, 2019 9:29 pm
panhead wrote:
Sun Sep 08, 2019 9:27 pm
Hi All, I started a new job and this company’s 401k has a stable value fund. It’s T Rowe Price Stable Value Common Trust B, it appears to have a yield of about 2.25% and an expense ratio of 0.25% so resulting actual yield is about 2.00%. This 401k also has Vanguard Total Bond Market Index Inst (VBTIX). This fund has an SEC yield of 2.20%. I plan on rolling my old 401k plan into this one, so I soon will have a sizable balance in this plan. I’ve never had a plan that had a stable value fund, so I’m trying to figure out how to best use it, if I should use it at all. I’ve done a search, but like often happens, I can’t find something specific enough to my own situation to really help, so I figured I’d ask for opinions here.

Let’s consider an example with simple numbers. Say you have:

Portfolio of $2M
50/50 portfolio of stock/fixed income
$400k muni bond fund in taxable (Vanguard intermediate term tax exempt (VWIUX)
$600k in the new 401k (after roll-ins) which has the stable value fund and VBTIX (Vanguard total bond inst)
You desire to maintain a 50/50 AA
You are in your early 50s
retirement as soon as 5 years away, to as far as 12.

What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
I may be wrong, but I think the stated yield is after the E.R. is figured in.
The stable value fund doesn't list any kind of SEC yield, all I could find was a 1yr return. Since the price is stable at $1.00, the yield was $2.25. Since this is not an SEC yield, I don' think it would take into account the ER. It is basically a distribution yield.
1 year return should also include ER, no?
My understanding is that, no, it does not. Distribution yield doesn't reflect the ER, while SEC yield does. I'm *pretty* sure that the the net yield of the stable value fund is 2.00%.

Eno Deb
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Joined: Sun Feb 03, 2019 4:08 pm

Re: new 401k with stable value fund...should I use it? for how much?

Post by Eno Deb » Sun Sep 08, 2019 10:10 pm

panhead wrote:
Sun Sep 08, 2019 9:54 pm
My understanding is that, no, it does not. Distribution yield doesn't reflect the ER, while SEC yield does. I'm *pretty* sure that the the net yield of the stable value fund is 2.00%.
Investment returns are always reported net of expenses, i.e. if it lists last years annual return as 2.25%, that's what an investor would have received.

As to the question whether to use stable value funds, I think they can be a useful diversification for your fixed income portfolio. They are essentially bond funds wrapped into insurance contracts that prevent big swings of the NAV in exchange for slightly lower returns. But I wouldn't exclusively use them. If you are willing to consider bond market timing, they might be appropriate in times of rising interest rates (which is not now).

Topic Author
panhead
Posts: 338
Joined: Fri Feb 22, 2013 10:53 am

Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Mon Sep 09, 2019 8:07 am

Eno Deb wrote:
Sun Sep 08, 2019 10:10 pm
panhead wrote:
Sun Sep 08, 2019 9:54 pm
My understanding is that, no, it does not. Distribution yield doesn't reflect the ER, while SEC yield does. I'm *pretty* sure that the the net yield of the stable value fund is 2.00%.
Investment returns are always reported net of expenses, i.e. if it lists last years annual return as 2.25%, that's what an investor would have received.

As to the question whether to use stable value funds, I think they can be a useful diversification for your fixed income portfolio. They are essentially bond funds wrapped into insurance contracts that prevent big swings of the NAV in exchange for slightly lower returns. But I wouldn't exclusively use them. If you are willing to consider bond market timing, they might be appropriate in times of rising interest rates (which is not now).
Thanks for this. I knew that expenses were accounted for in SEC yield, I did not know that they were accounted for in ytd/1yr/5yr/etc numbers. I learned something!
Also, thanks for the input on the use of a SVF. I'm still contemplating how much, if anything, to allocate to this. With the current low yields, TBM and the SVF have the same yield.

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vineviz
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Re: new 401k with stable value fund...should I use it? for how much?

Post by vineviz » Mon Sep 09, 2019 8:31 am

panhead wrote:
Sun Sep 08, 2019 9:27 pm
You are in your early 50s
retirement as soon as 5 years away, to as far as 12.

What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
I see no reason to hold an allocation to cash (which is what a stable value fund amounts to) in a retirement portfolio for someone at least 8 years from retirement. An intermediate- or long-term bond fund would be the appropriate allocation.

A 50% bond allocation is very high for someone so young: I'd suggest looking for an intermediate-term TIPS fund for a significant portion of that allocation.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Topic Author
panhead
Posts: 338
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Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Mon Sep 09, 2019 8:47 am

vineviz wrote:
Mon Sep 09, 2019 8:31 am
panhead wrote:
Sun Sep 08, 2019 9:27 pm
You are in your early 50s
retirement as soon as 5 years away, to as far as 12.

What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
I see no reason to hold an allocation to cash (which is what a stable value fund amounts to) in a retirement portfolio for someone at least 8 years from retirement. An intermediate- or long-term bond fund would be the appropriate allocation.

A 50% bond allocation is very high for someone so young: I'd suggest looking for an intermediate-term TIPS fund for a significant portion of that allocation.
Interesting take, thanks for the response. The easiest thing for me to do would be to go TBM all in. As for the allocation, since my portfolio size as a multiple of my expenses is about 33-35x, I'm perfectly comfortable with a 50/50 allocation.
Edited to add: I'm not interested in adding TIPS at this point, nor do I have access to a TIPS fund in my 401k.

Eno Deb
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Re: new 401k with stable value fund...should I use it? for how much?

Post by Eno Deb » Mon Sep 09, 2019 10:19 am

panhead wrote:
Mon Sep 09, 2019 8:47 am
What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
The more appropriate comparison for a stable value fund are really money market funds. Ideally a SV fund will provide slightly higher interest in exchange for slightly more risk compared to MM funds. An intermediate term bond fund like VBMFX can behave very differently.

KnowNth
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Re: new 401k with stable value fund...should I use it? for how much?

Post by KnowNth » Mon Sep 09, 2019 12:00 pm

Shouldn't the cash and bond interest comparison be part of the equation before cash is dismissed?

Vanguard intermediate bond yields 2.49% now

If the stable value fund yields 2.5% or higher, would you still favor bond?

vineviz wrote:
Mon Sep 09, 2019 8:31 am
panhead wrote:
Sun Sep 08, 2019 9:27 pm
You are in your early 50s
retirement as soon as 5 years away, to as far as 12.

What, if any, allocation would you put into the stable value fund versus the vanguard total bond fund?
I see no reason to hold an allocation to cash (which is what a stable value fund amounts to) in a retirement portfolio for someone at least 8 years from retirement. An intermediate- or long-term bond fund would be the appropriate allocation.

A 50% bond allocation is very high for someone so young: I'd suggest looking for an intermediate-term TIPS fund for a significant portion of that allocation.

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vineviz
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Re: new 401k with stable value fund...should I use it? for how much?

Post by vineviz » Mon Sep 09, 2019 1:18 pm

KnowNth wrote:
Mon Sep 09, 2019 12:00 pm
Shouldn't the cash and bond interest comparison be part of the equation before cash is dismissed?

Vanguard intermediate bond yields 2.49% now

If the stable value fund yields 2.5% or higher, would you still favor bond?
My reference point is that markets are, although not prescient, are highly efficient. The default assumption, then, should be one of two things when cash instruments (like stable value funds, CDs, etc.) are yielding more than intermediate-term bond funds: 1) you've got a mismatched comparison; or 2) you've got an apples/oranges comparison in terms of risk.

A "stable value" fund that is paying investors 2.5% is also paying its manager an administrative fee along with plan expenses etc. It's not a charity, so it therefore must be investing in instruments that yield MORE than 2.5%. The only way to get a higher expected return is to take on more risk, generally speaking, so the investor must always ask what risk they are taking.

The main risk that is greater in a stable value fund relative to an intermediate bond fund is reinvestment risk, or the risk that the yield from the stable value fund may be reinvested at lower and lower yields in the future. Indeed, when the yield curve inverts this is just the market banking on the increased probability that short-term yields tomorrow will be lower than they are today.

The only way to minimize interest rate risk is to match the duration of the bond portfolio to your investment horizon. An investor who is 50 years old and 10 years from retirement has an investment horizon of 25 years or more.

So, yes, I would still favor bonds over cash in that circumstance.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

KnowNth
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Re: new 401k with stable value fund...should I use it? for how much?

Post by KnowNth » Mon Sep 09, 2019 4:04 pm

Vineviz, thanks for the reply, but I am a little confused.

1. My understanding is the stable value funds protected the investors with the future decline in yield. So the fund companies will shoulder the risks instead of the investors, right?

2. Reinvestment Risk. Won't the bond fund face the same risk?

Fully liquid TIAA traditional guarantees 3% at the moment. Would you still buy intermediate bond instead?


vineviz wrote:
Mon Sep 09, 2019 1:18 pm
KnowNth wrote:
Mon Sep 09, 2019 12:00 pm
Shouldn't the cash and bond interest comparison be part of the equation before cash is dismissed?

Vanguard intermediate bond yields 2.49% now

If the stable value fund yields 2.5% or higher, would you still favor bond?
My reference point is that markets are, although not prescient, are highly efficient. The default assumption, then, should be one of two things when cash instruments (like stable value funds, CDs, etc.) are yielding more than intermediate-term bond funds: 1) you've got a mismatched comparison; or 2) you've got an apples/oranges comparison in terms of risk.

A "stable value" fund that is paying investors 2.5% is also paying its manager an administrative fee along with plan expenses etc. It's not a charity, so it therefore must be investing in instruments that yield MORE than 2.5%. The only way to get a higher expected return is to take on more risk, generally speaking, so the investor must always ask what risk they are taking.

The main risk that is greater in a stable value fund relative to an intermediate bond fund is reinvestment risk, or the risk that the yield from the stable value fund may be reinvested at lower and lower yields in the future. Indeed, when the yield curve inverts this is just the market banking on the increased probability that short-term yields tomorrow will be lower than they are today.

The only way to minimize interest rate risk is to match the duration of the bond portfolio to your investment horizon. An investor who is 50 years old and 10 years from retirement has an investment horizon of 25 years or more.

So, yes, I would still favor bonds over cash in that circumstance.

Topic Author
panhead
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Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Tue Sep 10, 2019 6:35 am

KnowNth wrote:
Mon Sep 09, 2019 4:04 pm
Vineviz, thanks for the reply, but I am a little confused.

1. My understanding is the stable value funds protected the investors with the future decline in yield. So the fund companies will shoulder the risks instead of the investors, right?

2. Reinvestment Risk. Won't the bond fund face the same risk?

Fully liquid TIAA traditional guarantees 3% at the moment. Would you still buy intermediate bond instead?


vineviz wrote:
Mon Sep 09, 2019 1:18 pm
KnowNth wrote:
Mon Sep 09, 2019 12:00 pm
Shouldn't the cash and bond interest comparison be part of the equation before cash is dismissed?

Vanguard intermediate bond yields 2.49% now

If the stable value fund yields 2.5% or higher, would you still favor bond?
My reference point is that markets are, although not prescient, are highly efficient. The default assumption, then, should be one of two things when cash instruments (like stable value funds, CDs, etc.) are yielding more than intermediate-term bond funds: 1) you've got a mismatched comparison; or 2) you've got an apples/oranges comparison in terms of risk.

A "stable value" fund that is paying investors 2.5% is also paying its manager an administrative fee along with plan expenses etc. It's not a charity, so it therefore must be investing in instruments that yield MORE than 2.5%. The only way to get a higher expected return is to take on more risk, generally speaking, so the investor must always ask what risk they are taking.

The main risk that is greater in a stable value fund relative to an intermediate bond fund is reinvestment risk, or the risk that the yield from the stable value fund may be reinvested at lower and lower yields in the future. Indeed, when the yield curve inverts this is just the market banking on the increased probability that short-term yields tomorrow will be lower than they are today.

The only way to minimize interest rate risk is to match the duration of the bond portfolio to your investment horizon. An investor who is 50 years old and 10 years from retirement has an investment horizon of 25 years or more.

So, yes, I would still favor bonds over cash in that circumstance.
I do appreciate the comments, but these points are moot to me as I don't have these things available to me.

I have:

Stable value fund: T Rowe Price Stable Value Common Trust, yield: 2.25%
VBTIX: Vanguard Total Bond Market Index Inst, SEC Yield: 2.20%

Given these options, is there any reason to utilize the stable value fund, and if so, given the portfolio conditions listed in the original post, at what allocation?

student
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Re: new 401k with stable value fund...should I use it? for how much?

Post by student » Tue Sep 10, 2019 6:41 am

panhead wrote:
Tue Sep 10, 2019 6:35 am
I have:

Stable value fund: T Rowe Price Stable Value Common Trust, yield: 2.25%
VBTIX: Vanguard Total Bond Market Index Inst, SEC Yield: 2.20%

Given these options, is there any reason to utilize the stable value fund, and if so, given the portfolio conditions listed in the original post, at what allocation?
In the long run, I think they will be very similar. I believe over 20 years, stable value fund will slightly underperform bond index fund but it will smooth out the bond curve during this time. Personally, I have almost all my fixed income in stable value because I want this portion to be "stable."

Topic Author
panhead
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Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Tue Sep 10, 2019 7:57 am

student wrote:
Tue Sep 10, 2019 6:41 am
panhead wrote:
Tue Sep 10, 2019 6:35 am
I have:

Stable value fund: T Rowe Price Stable Value Common Trust, yield: 2.25%
VBTIX: Vanguard Total Bond Market Index Inst, SEC Yield: 2.20%

Given these options, is there any reason to utilize the stable value fund, and if so, given the portfolio conditions listed in the original post, at what allocation?
In the long run, I think they will be very similar. I believe over 20 years, stable value fund will slightly underperform bond index fund but it will smooth out the bond curve during this time. Personally, I have almost all my fixed income in stable value because I want this portion to be "stable."
Interesting. I've read quite a few posts on here where people have the majority of their fixed income in a stable value fund, but many of these funds seem to be paying 3% or more. Given current yields, this is very good, but as was mentioned above, how does it do this and with what risk? Apparently there exists some risk in the insurer going bankrupt, but this seems quite unlikely in most cases.

Eno Deb
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Re: new 401k with stable value fund...should I use it? for how much?

Post by Eno Deb » Tue Sep 10, 2019 10:43 am

panhead wrote:
Tue Sep 10, 2019 6:35 am
I have:

Stable value fund: T Rowe Price Stable Value Common Trust, yield: 2.25%
VBTIX: Vanguard Total Bond Market Index Inst, SEC Yield: 2.20%

Given these options, is there any reason to utilize the stable value fund, and if so, given the portfolio conditions listed in the original post, at what allocation?
If I understood your earlier posts correctly, you're comparing a short-term SEC yield (usually 7 or 30 days) to historical returns from last year, i.e. apples and oranges.

I still don't understand why you are making this comparison at all. The primary goal of a stable value fund is conservation of principal. That is very different from an intermediate term bond fund. You can't really answer the allocation question without first stating your goals.

Dottie57
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Re: new 401k with stable value fund...should I use it? for how much?

Post by Dottie57 » Tue Sep 10, 2019 11:21 am

I started putting money into Stable Value about 3 years before retirement and the rate became about 2%. Now about 1/2 of FI in 401k is in Stable Value.

Topic Author
panhead
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Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Wed Sep 11, 2019 6:14 am

I just found this thread from years ago that is on point.

viewtopic.php?t=131294

Topic Author
panhead
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Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Wed Sep 11, 2019 6:29 am

Eno Deb wrote:
Tue Sep 10, 2019 10:43 am
panhead wrote:
Tue Sep 10, 2019 6:35 am
I have:

Stable value fund: T Rowe Price Stable Value Common Trust, yield: 2.25%
VBTIX: Vanguard Total Bond Market Index Inst, SEC Yield: 2.20%

Given these options, is there any reason to utilize the stable value fund, and if so, given the portfolio conditions listed in the original post, at what allocation?
If I understood your earlier posts correctly, you're comparing a short-term SEC yield (usually 7 or 30 days) to historical returns from last year, i.e. apples and oranges.

I still don't understand why you are making this comparison at all. The primary goal of a stable value fund is conservation of principal. That is very different from an intermediate term bond fund. You can't really answer the allocation question without first stating your goals.

As far as 1 year return vs SEC yield comparison, you are correct this is the comparison I'm using because as far as I can tell, the stable value fund does not have an SEC yield, and I don't want to use the 1 year return for the bond fund because that takes into account price fluctuations which the bond fund has while the SVF should not.

I'm making this comparison because the yield on the two funds is almost identical while the SVF won't (or shouldn't) have price fluctuations. Its the same reason that some people might choose to use CDs instead of a bond fund for a part of their fixed income.

As for my goals, for the fixed income of my portfolio I'd like to get a reasonable return while balancing risk.

Topic Author
panhead
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Re: new 401k with stable value fund...should I use it? for how much?

Post by panhead » Wed Sep 11, 2019 6:31 am

Dottie57 wrote:
Tue Sep 10, 2019 11:21 am
I started putting money into Stable Value about 3 years before retirement and the rate became about 2%. Now about 1/2 of FI in 401k is in Stable Value.
Thanks Dottie, I keep running into this theme that 1/2 of fixed income is reasonable for an allocation to stable value. Seems like the "split the difference" take on things when one isn't sure what to do, like having a 50/50 stocks/bonds portfolio (which I do).

I'm also considering going 50/50 FI/SVF

Eno Deb
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Re: new 401k with stable value fund...should I use it? for how much?

Post by Eno Deb » Wed Sep 11, 2019 10:52 am

panhead wrote:
Wed Sep 11, 2019 6:29 am
I'm making this comparison because the yield on the two funds is almost identical while the SVF won't (or shouldn't) have price fluctuations.
I don't think this is the right way to look at it. Investment yield includes price fluctuations (for better or worse), which means the yield isn't anywhere near identical. For example, if you look at the past year from today, the Vanguard TBM's total return was about 10% (which is admittedly exceptional), while a SV fund is probably somewhere around 2-2.5%. What you probalby mean is the distribution yield, but that's only part of the story.
Its the same reason that some people might choose to use CDs instead of a bond fund for a part of their fixed income.
People buy CDs when capital preservation is most important, or when they want to lock in interest rates for the near term. Nothing wrong with that, but over longer time horizons you'll very likely be better off with bonds. As someone else mentioned earlier, you should look at your time horizon in relation to the duration of the bond fund. If your 401k offers a short term bond fund, that's another way to reduce the interest rate risk.

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