Bond Fund vs. Stable Value

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Chester1a
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Bond Fund vs. Stable Value

Post by Chester1a » Wed Jan 31, 2018 10:01 am

I would appreciate any opinions on whether I should use a bond index fund or a stable value fund in my 401k as part of my 3-fund portfolio.

My choices are: Morley Stable Value or Fidelity U.S. Bond Index (FSXTS).

Thanks in advance!

rterickson
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Re: Bond Fund vs. Stable Value

Post by rterickson » Wed Jan 31, 2018 2:02 pm

I have a similar choice in my 457 plan (different funds though).

The 1-year and 10-year returns were slightly better for the bond fund, the stable value did better over 3-year and 5-year time frames.

I ended up putting half of my total allocation in each.

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Wed Jan 31, 2018 7:14 pm

What is the net rate on the stable-value? I use 50/50 at Megacorp, because their fund is decent.
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Re: Bond Fund vs. Stable Value

Post by Agggm » Wed Jan 31, 2018 7:18 pm

Chester1a wrote:
Wed Jan 31, 2018 10:01 am
I would appreciate any opinions on whether I should use a bond index fund or a stable value fund in my 401k as part of my 3-fund portfolio.

My choices are: Morley Stable Value or Fidelity U.S. Bond Index (FSXTS).

Thanks in advance!
Use both.

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whodidntante
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Re: Bond Fund vs. Stable Value

Post by whodidntante » Wed Jan 31, 2018 7:18 pm

If the stable value fund has a yield the same or higher than the bond index, I would put 100% in it. Otherwise 50/50. 50/50 is what I do. It effectively shortens the duration of my bond holdings, which reduces my term risk.

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sergeant
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Re: Bond Fund vs. Stable Value

Post by sergeant » Wed Jan 31, 2018 7:20 pm

Depends on the SV yield. If near the bond yield I would go SV.
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Phineas J. Whoopee
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Re: Bond Fund vs. Stable Value

Post by Phineas J. Whoopee » Wed Jan 31, 2018 9:21 pm

Please don't fall into the trap of thinking Stable Value Funds are devoid of risks.
PJW

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Thu Feb 01, 2018 12:32 am

Phineas J. Whoopee wrote:
Wed Jan 31, 2018 9:21 pm
Please don't fall into the trap of thinking Stable Value Funds are devoid of risks.
While not totally risk-free they are very close. Few problems have ever occurred.
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Phineas J. Whoopee
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Re: Bond Fund vs. Stable Value

Post by Phineas J. Whoopee » Thu Feb 01, 2018 7:18 pm

Earl Lemongrab wrote:
Thu Feb 01, 2018 12:32 am
Phineas J. Whoopee wrote:
Wed Jan 31, 2018 9:21 pm
Please don't fall into the trap of thinking Stable Value Funds are devoid of risks.
While not totally risk-free they are very close. Few problems have ever occurred.
I suggest investors not conflate verb tenses.

OP: if you have questions about the risks of stable value funds, please ask. Many of us would be happy to explain.

PJW

jalbert
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Re: Bond Fund vs. Stable Value

Post by jalbert » Fri Feb 02, 2018 12:49 am

The Morley SVF is a well run fund. Morley Capital Management merged with Gartmore Funds years back, and then the combined company was later bought by an insurance company, Principal Financial Group, aka The Principal, who still owns them.

The attractiveness or lack thereof of this fund would center on whether the rate is worthwhile in your retirement plan. The Principal is not famous for low fees (quite the opposite).

Because SVFs have credit risk, one line of thinking would be to diversify with bond funds that don't have credit risk, rather than a total bond market index fund.
Index fund investor since 1987.

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Re: Bond Fund vs. Stable Value

Post by ugaDAWGS09 » Fri Feb 02, 2018 8:04 am

I work for a grocery chain (Bi-Lo, Winn-Dixie, Harveys), and have a Southeastern Grocers Stable value fund in my 401k. I've read a lot recently about the debt of the company I work for and heard talk of a buyout so I'm not sure how this would affect the stable value fund if something were to happen. I pulled all of my money out of it and placed it in a Baird Core Plus Intermediate-Bond fund. I just don't want anything in SEG grocers owned fund if they go belly up.

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Fri Feb 02, 2018 11:26 am

Phineas J. Whoopee wrote:
Thu Feb 01, 2018 7:18 pm
Earl Lemongrab wrote:
Thu Feb 01, 2018 12:32 am
Phineas J. Whoopee wrote:
Wed Jan 31, 2018 9:21 pm
Please don't fall into the trap of thinking Stable Value Funds are devoid of risks.
While not totally risk-free they are very close. Few problems have ever occurred.
I suggest investors not conflate verb tenses.

OP: if you have questions about the risks of stable value funds, please ask. Many of us would be happy to explain.
What else do we have to go on? We know the structure of the various forms, and we see how that structure has been tested in the past. No one can predict the future of course. But this is not a case of predicting return, but safety. That's a different task and one that's quite reasonable to use past results to analyze.
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rterickson
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Re: Bond Fund vs. Stable Value

Post by rterickson » Fri Feb 02, 2018 4:07 pm

Earl Lemongrab wrote:
Wed Jan 31, 2018 7:14 pm
What is the net rate on the stable-value? I use 50/50 at Megacorp, because their fund is decent.
Mine (MassMutual/Hartford) is 4%.

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dodecahedron
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Re: Bond Fund vs. Stable Value

Post by dodecahedron » Fri Feb 02, 2018 4:34 pm

Earl Lemongrab wrote:
Fri Feb 02, 2018 11:26 am
Phineas J. Whoopee wrote:
Thu Feb 01, 2018 7:18 pm
Earl Lemongrab wrote:
Thu Feb 01, 2018 12:32 am
Phineas J. Whoopee wrote:
Wed Jan 31, 2018 9:21 pm
Please don't fall into the trap of thinking Stable Value Funds are devoid of risks.
While not totally risk-free they are very close. Few problems have ever occurred.
I suggest investors not conflate verb tenses.

OP: if you have questions about the risks of stable value funds, please ask. Many of us would be happy to explain.
What else do we have to go on? We know the structure of the various forms, and we see how that structure has been tested in the past. No one can predict the future of course. But this is not a case of predicting return, but safety. That's a different task and one that's quite reasonable to use past results to analyze.
Go back to August 2008 and think about how reasonable folks thought it was to use past results to analyze the safety of money market funds. Had the government not intervened, they could have imploded the next month. Many things that had seemed safe based on past history no longer were safe. Black swans happen.

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Fri Feb 02, 2018 4:47 pm

dodecahedron wrote:
Fri Feb 02, 2018 4:34 pm
Earl Lemongrab wrote:
Fri Feb 02, 2018 11:26 am
What else do we have to go on? We know the structure of the various forms, and we see how that structure has been tested in the past. No one can predict the future of course. But this is not a case of predicting return, but safety. That's a different task and one that's quite reasonable to use past results to analyze.
Go back to August 2008 and think about how reasonable folks thought it was to use past results to analyze the safety of money market funds. Had the government not intervened, they could have imploded the next month. Many things that had seemed safe based on past history no longer were safe. Black swans happen.
What happened to stable-value funds during that period? Few problems. There are many black swans that could implode any investments. That doesn't make everything equally risky. Stable-value is very low risk. That's based on the structure and how that structure has withstood tests.
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Phineas J. Whoopee
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Re: Bond Fund vs. Stable Value

Post by Phineas J. Whoopee » Fri Feb 02, 2018 4:55 pm

Earl Lemongrab wrote:
Fri Feb 02, 2018 4:47 pm
dodecahedron wrote:
Fri Feb 02, 2018 4:34 pm
Earl Lemongrab wrote:
Fri Feb 02, 2018 11:26 am
What else do we have to go on? We know the structure of the various forms, and we see how that structure has been tested in the past. No one can predict the future of course. But this is not a case of predicting return, but safety. That's a different task and one that's quite reasonable to use past results to analyze.
Go back to August 2008 and think about how reasonable folks thought it was to use past results to analyze the safety of money market funds. Had the government not intervened, they could have imploded the next month. Many things that had seemed safe based on past history no longer were safe. Black swans happen.
What happened to stable-value funds during that period? Few problems. There are many black swans that could implode any investments. That doesn't make everything equally risky. Stable-value is very low risk. That's based on the structure and how that structure has withstood tests.
I don't know how we got into an argument, Earl Lemongrab. Stable Value Funds have risks, they're not immediately apparent, and the time to assess risks is before a problem, not after one. We explicitly agree in this thread that there are two fundamentally different structures, that each has its risks, that the risks are not the same, and they're not that bad.

Why are we having this (now 3-party) back and forth, rather than just offering to the original poster to explain how they work and what can go wrong, if the original poster is interested?

PJW
Last edited by Phineas J. Whoopee on Fri Feb 02, 2018 5:09 pm, edited 1 time in total.

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Fri Feb 02, 2018 5:08 pm

^^ Because some people decided to make them sound riskier than they are. I never said that they were risk-free, just very low risk. Do you agree or disagree? Does Dodecahedron? If we all agree then there is no further need of discussion. If not, then it's reasonable to discuss it.
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Phineas J. Whoopee
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Re: Bond Fund vs. Stable Value

Post by Phineas J. Whoopee » Fri Feb 02, 2018 5:26 pm

Earl Lemongrab wrote:
Fri Feb 02, 2018 5:08 pm
^^ Because some people decided to make them sound riskier than they are. I never said that they were risk-free, just very low risk. Do you agree or disagree? Does Dodecahedron? If we all agree then there is no further need of discussion. If not, then it's reasonable to discuss it.
If by pointing out they are not devoid of risk, those were my words, I'm among the people who made them sound riskier than they are then I apologize. They are not without risk, as I posted, and as I believe we agree.

How can we possibly argue about simple straightforward facts that nonetheless are not necessarily obvious, but which we all accept?

My experience with Stable Value Funds, both personally in my own retirement plans and in speaking with other people whose plans were elsewhere, was they were promoted, although not officially by people who would have personal legal liability for having done so, as having no more risk than insured savings accounts, which we all agree, I hope, is untrue.

There were the weasel words in the fine-print literature, and there were the things people told each other so they wouldn't have to put on their reading glasses.

Some risk is significantly more than none.

I again suggest we offer to the original poster, should that person be interested, to explain how Stable Value Funds are structured (in both forms), and what can go wrong. If we disagree on offering to do that then we truly are far apart.

I think, Earl Lemongrab, that we are in vehement agreement.

Pax?

PJW

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Fri Feb 02, 2018 6:06 pm

Sounds good. Now, towards the OP's question (if still around) there are a few basic types of stable-value funds. One uses an insurance company's general fund. So to an extent the fund is reliant upon that company. Another is the "synthetic GICs". There a fund buys an assortment of fixed-income products. It also purchases insurance "wrappers" that guarantee the rate and principal. It's worthwhile exploring how your particular fund is structured.
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Phineas J. Whoopee
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Re: Bond Fund vs. Stable Value

Post by Phineas J. Whoopee » Fri Feb 02, 2018 6:15 pm

Hi Chester1a, and welcome to the forum.

Now that Earl Lemongrab and I agree that we agree and are not arguing, for more information I'd like to point you to our wiki article about Stable Value Funds: Stable value fund.

If after you've read it you have more questions please don't hesitate to post them. We're always happy to help.

Once again, welcome.

PJW

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dodecahedron
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Re: Bond Fund vs. Stable Value

Post by dodecahedron » Fri Feb 02, 2018 6:19 pm

Earl Lemongrab wrote:
Fri Feb 02, 2018 5:08 pm
^^ Because some people decided to make them sound riskier than they are. I never said that they were risk-free, just very low risk. Do you agree or disagree? Does Dodecahedron? If we all agree then there is no further need of discussion. If not, then it's reasonable to discuss it.
I believe the particular one I invest in (liquid version of TIAA Trad held in an SRA) is low-risk, but not simply because of its historic track record nor the historic track record of the asset class as a whole.

I believe it to be low-risk because I think TIAA gets a lot of scrutiny from regulators, some of whom I know personally and whose judgment I trust, because it has a generous margin of safety in its reserves held in the TIAA general fund, and because a lot of TIAA's liabilities can't be called in immediately since many folks who hold TIAA Trad have a less liquid form than I do (and get compensated for that illiquidity with a higher interest rate than I do.) That said, I have my eye very much on the exit door and I do not have any illusions that it will necessarily be safe forever. I hope it will but it bears careful watching. I was not happy about TIAA's acquisition of Nuveen and I hope they don't do anything else ill-advised like that in the future. The quality of the assets backing my holding is not quite what it was before the Nuveen acquisition.

As for the asset class of stable funds in general, I have not done the due diligence on any others to be able to say with any confidence whether they are safe or not. I would have to do a lot of tirekicking (looking at the backing for the stable value fund) before I could say the same thing about another stable value fund.

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Phineas J. Whoopee
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Re: Bond Fund vs. Stable Value

Post by Phineas J. Whoopee » Fri Feb 02, 2018 6:34 pm

Hi dodecahedron.

No need to scuff the toes of your shoes. We have a wiki article about Stable Value Funds: Stable value fund.

PJW

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Fri Feb 02, 2018 6:37 pm

I had a whole thing ready to go, talking about airline safety, but really this isn't helping. I think if Dodecahedron wants to discuss this, a new thread in Theory would be in order.
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Re: Bond Fund vs. Stable Value

Post by LadyGeek » Fri Feb 02, 2018 7:29 pm

^^^ In either case, please stay on-topic to help the OP.
Chester1a wrote:
Wed Jan 31, 2018 10:01 am
I would appreciate any opinions on whether I should use a bond index fund or a stable value fund in my 401k as part of my 3-fund portfolio.

My choices are: Morley Stable Value or Fidelity U.S. Bond Index (FSXTS).

Thanks in advance!
Welcome! May I recommend posting your portfolio in this thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

What are the rest of your choices? It may come down to a matter of cost. Part of the Asking Portfolio Questions format is to list the Expense ratio of your fund choices.

Is this your stable value fund? Morley Capital Management Your 401k should supply a fact sheet with the expense ratio.

I couldn't find the ticker symbol FSXTS. Did you mean this one: FSITX - Fidelity ® U.S. Bond Index Fund? Your 401k plan fact sheet will have the correct ticker symbol and expense ratio.

Take your time and do some reading. Start here: Getting started

If you have any questions, ask them here. (You don't need to understand the previous interchange.)
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Re: Bond Fund vs. Stable Value

Post by Dottie57 » Fri Feb 02, 2018 7:34 pm

rterickson wrote:
Wed Jan 31, 2018 2:02 pm
I have a similar choice in my 457 plan (different funds though).

The 1-year and 10-year returns were slightly better for the bond fund, the stable value did better over 3-year and 5-year time frames.

I ended up putting half of my total allocation in each.
I've done same.

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Sat Feb 03, 2018 2:14 pm

As I mentioned above, I am 50/50 stable-value and bond index. I started that in 2007. I have not had a need to rebalance between the two. Currently the difference between them is 0.8% in favor of the stable-value fund. For the past 10 years or so, it wouldn't have made any substantive difference which I chose. The future is unknown, of course.
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Re: Bond Fund vs. Stable Value

Post by tibbitts » Sat Feb 03, 2018 2:19 pm

With stable value at 1.9% for the next two months at least, I've begun moving a little toward mostly short bond funds. Probably I would have stayed put at 2.0%+.

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Re: Bond Fund vs. Stable Value

Post by whodidntante » Sat Feb 03, 2018 2:25 pm

tibbitts wrote:
Sat Feb 03, 2018 2:19 pm
With stable value at 1.9% for the next two months at least, I've begun moving a little toward mostly short bond funds. Probably I would have stayed put at 2.0%+.
My stable value fund pay 1.97% which is nothing to brag about. It uses synthetic GICs which is a conservative way of managing a stable value fund.

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Re: Bond Fund vs. Stable Value

Post by Hogan773 » Mon Feb 12, 2018 2:21 pm

So my Stable Value Fund has a current yield of 2.2% and an ER of 0.03%.

I currently have about 50/50 split between the Stable Value and the Vanguard Total Bond Market Index fund for the bond component of my 401K/Pension assets held at my employer.

Does it make sense to move to a higher % (or all) in the SVF and away from Total Bond Mkt if the view is that rates are going to rise due to budget deficits, etc? The Total Bond Mkt fund has a duration of 7yrs so even a 50bp rise will result in a slightly negative return vs the interest income, and of course if the 10yr gets to 4% or 5% in the next few years the decline will be worse, while I would just get a 2.2% positive return.

I suppose this is just a form of market timing though, which is why many seem to suggest keeping 50/50. There has been a longstanding call for higher rates and many headfakes where rates actually declined. I guess there could also be a vote for diversification as Total Bond Market fund probably has more diversified risk while a Stable Capital Fund relies on the insurance companies writing the principal protection component.

I know it would have been better to do this move awhile back before rates really started rising.....

Thoughts?

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Earl Lemongrab
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Re: Bond Fund vs. Stable Value

Post by Earl Lemongrab » Mon Feb 12, 2018 7:23 pm

Hogan773 wrote:
Mon Feb 12, 2018 2:21 pm
So my Stable Value Fund has a current yield of 2.2% and an ER of 0.03%.

I currently have about 50/50 split between the Stable Value and the Vanguard Total Bond Market Index fund for the bond component of my 401K/Pension assets held at my employer.

Does it make sense to move to a higher % (or all) in the SVF and away from Total Bond Mkt if the view is that rates are going to rise due to budget deficits, etc? Thoughts?
Rates have gone up recently, but that doesn't mean that they will continue to do so. They might go down again. People have been trying to predict rates with little success for many years now.

I have a 50/50 allocation as you describe. I will keep that.
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Re: Bond Fund vs. Stable Value

Post by jalbert » Tue Feb 13, 2018 1:10 am

Stable Value funds can be slow to respond to rising rates.
Many have restrictions against moving assets in or out of a SVF from or to other fixed income investments. Such a restriction is to prevent participants from arbitraging between a SVF and bond fund.

Thus, a bond fund might lose value when rates rise, but it immediately will be earning the higher yield on the lower principal, while the SVF fund keeps earning the lower yield on the higher principal. There is no guarantee that a SVF will earn a higher return than a bond fund over time in a rising rate environment, but it will reduce volatility spawned by interest rate movements.
Index fund investor since 1987.

Chester1a
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Re: Bond Fund vs. Stable Value

Post by Chester1a » Tue Feb 13, 2018 9:37 am

Thanks to everyone for contributing to the discussion. I decided to stick with the Fidelity bond fund.

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Re: Bond Fund vs. Stable Value

Post by Hogan773 » Tue Feb 13, 2018 11:34 am

jalbert wrote:
Tue Feb 13, 2018 1:10 am
Stable Value funds can be slow to respond to rising rates.
Many have restrictions against moving assets in or out of a SVF from or to other fixed income investments. Such a restriction is to prevent participants from arbitraging between a SVF and bond fund.

Thus, a bond fund might lose value when rates rise, but it immediately will be earning the higher yield on the lower principal, while the SVF fund keeps earning the lower yield on the higher principal. There is no guarantee that a SVF will earn a higher return than a bond fund over time in a rising rate environment, but it will reduce volatility spawned by interest rate movements.
Interesting

So if I take the example of Vanguard Total Bond Mkt, with current yield of 2.6% and duration of 7 yrs. If market rates rise by 1% in the medium area of the curve over a year, the NAV of my fund would decline by 7% offset by the 2.6% earned yield and then the yield would be growing to 3.6%, so maybe overall I would have lost 4% over that year. In the Stable Value, I would earn a positive 2.2% and no decline in NAV, but you are saying that the yield might not get to 3.2% quickly or at all.

I guess if we are "sure" that rates are really going to rise that much then makes sense to be in the Stable Value, but yes I know that is market timing and if we have an equity market crash we might find people rushing into bonds and pushing the yields lower, and then the Total Bond Market will beat the Stable Value. And if rates stay flat, the Total Bond Market beats the Stable Value too. I guess I have no real insight as to the actual movement in rates beyond just that gut feel, which is why everyone suggests keeping a mix of both.

Curious though why people advocate even using ANY of the Stable Value if people truly believe that rates rising/falling are impossible to predict? If we assume it is a crapshoot whether they rise, fall or stay the same tomorrow vs today, wouldn't that then suggest that you should be 100% in the Total Bond Market fund with its higher yield since you have equal chance of a NAV tailwind, headwind or calm wind on the change in rates on a 7yr duration?

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Re: Bond Fund vs. Stable Value

Post by Agggm » Tue Feb 13, 2018 11:42 am

Chester1a wrote:
Wed Jan 31, 2018 10:01 am
I would appreciate any opinions on whether I should use a bond index fund or a stable value fund in my 401k as part of my 3-fund portfolio.

My choices are: Morley Stable Value or Fidelity U.S. Bond Index (FSXTS).

Thanks in advance!
Use both. Make it a 4 fund portfolio.
If your stable value (SV) fund gives a healthy rate of 4+ percent, tilt to SV. If it gives an unhealthy rate like 1%, tilt to bonds.

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Re: Bond Fund vs. Stable Value

Post by jalbert » Tue Feb 13, 2018 3:00 pm

Curious though why people advocate even using ANY of the Stable Value if people truly believe that rates rising/falling are impossible to predict? 
My decision to use a stable value fund has nothing to do with trying to predict future interest rates. Stable value funds and bond funds have moderately low correlation, so stable value funds present a diversification opportunity.

The biggest issue with stable value funds is their opacity-- it can be very difficult to understand what is being held in the underlying portfolio. If a SVF has reasonable risk and a crediting rate that rewards the level of risk being taken, then they are a useful fixed income diversifier.

The risk profile of a SVF is more similar to the risk profile of a fixed annuity offered by an insurance company than it is to the risk profile of a bond fund.
Index fund investor since 1987.

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