Low interest guaranteed fund vs bond index fund in 401K

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
bikechuck
Posts: 380
Joined: Sun Aug 16, 2015 9:22 pm

Low interest guaranteed fund vs bond index fund in 401K

Post by bikechuck » Mon Mar 12, 2018 2:01 pm

I have a small 401K from a former employer that I am using to hold a portion of my fixed income investments. Through this 401K I have access to a guaranteed income fund currently paying 1.75%. The 1.75% rate is low and I have not been using it extensively. However, given my expectation that interest rates will likely rise I am tempted to use this fund rather than a bond index fund at least for the next year or so.

I would be interested in comments about this approach.

mega317
Posts: 2557
Joined: Tue Apr 19, 2016 10:55 am

Re: Low interest guaranteed fund vs bond index fund in 401K

Post by mega317 » Mon Mar 12, 2018 3:16 pm

There are a large number of threads recently asking the same question in different ways. Everyone knows rate increases are likely, there is nothing you can do to "outsmart" the market. If a modest drop in a bond fund is not tolerable to you, then I would look at alternative fixed-income vehicles forever (savings accounts, CDs, I bonds, treasuries).

jalbert
Posts: 3928
Joined: Fri Apr 10, 2015 12:29 am

Re: Low interest guaranteed fund vs bond index fund in 401K

Post by jalbert » Mon Mar 12, 2018 4:52 pm

bikechuck wrote:
Mon Mar 12, 2018 2:01 pm
I have a small 401K from a former employer that I am using to hold a portion of my fixed income investments. Through this 401K I have access to a guaranteed income fund currently paying 1.75%. The 1.75% rate is low and I have not been using it extensively. However, given my expectation that interest rates will likely rise I am tempted to use this fund rather than a bond index fund at least for the next year or so.

I would be interested in comments about this approach.
You should understand the risks of the guaranteed option, likely a stable value fund, instead of assuming it is less risky than a bond index fund. Also the crediting rate of the stable value fund factors in compounding already, so the APR is likely a little less than 1.75%. By comparison, the 30-day average yield on the bond index fund is at 2.98%. This doesn't make the SVF look very attractive. Holding it short-term in the hopes rates rise further would not be a blunder, but if rates stay fairly stable for a while, or turn the other way, you will lose the bet.
Risk is not a guarantor of return.

bikechuck
Posts: 380
Joined: Sun Aug 16, 2015 9:22 pm

Re: Low interest guaranteed fund vs bond index fund in 401K

Post by bikechuck » Mon Mar 12, 2018 10:05 pm

jalbert wrote:
Mon Mar 12, 2018 4:52 pm
bikechuck wrote:
Mon Mar 12, 2018 2:01 pm
I have a small 401K from a former employer that I am using to hold a portion of my fixed income investments. Through this 401K I have access to a guaranteed income fund currently paying 1.75%. The 1.75% rate is low and I have not been using it extensively. However, given my expectation that interest rates will likely rise I am tempted to use this fund rather than a bond index fund at least for the next year or so.

I would be interested in comments about this approach.
You should understand the risks of the guaranteed option, likely a stable value fund, instead of assuming it is less risky than a bond index fund. Also the crediting rate of the stable value fund factors in compounding already, so the APR is likely a little less than 1.75%. By comparison, the 30-day average yield on the bond index fund is at 2.98%. This doesn't make the SVF look very attractive. Holding it short-term in the hopes rates rise further would not be a blunder, but if rates stay fairly stable for a while, or turn the other way, you will lose the bet.
Thanks for the thoughtful response and helpful input!

I probably should be paying more attention to the yield. Once my wife and I begin drawing SS we can comfortably live on it plus our portfolio earnings. So if I do not mess much with my allocation the yield is likely more important than the net asset value.

That said we will have some withdrawals coming when we sell our current house and buy a nicer condo. We always lived in a modest house that we could afford on one income. We saved a lot and promised ourselves we would eventually buy a nicer retirement place. We can easily do this with our savings but it will require a one time withdrawal of 5 - 7 percent of our portfolio. It would be nice to not have to draw that when valuations are depressed.

jalbert
Posts: 3928
Joined: Fri Apr 10, 2015 12:29 am

Re: Low interest guaranteed fund vs bond index fund in 401K

Post by jalbert » Mon Mar 12, 2018 11:02 pm

That's a different issue than trying to predict future interest rate movements. An intermediate bond fund is not a suitable investment for assets you will need in the short-term for some purpose, such as a condo purchase.

Such assets should be held as cash with no fluctation of principal. The return is secondary to preservation of principal.

A stable value fund is a reasonable substitute for cash holdings, but it is not without some risk. For instance, often there are triggering events that allow the fund provider to process withdrawals at market value of the securities held, whuch would mean passing interest rate risk on to you instead of absorbing it. If you are able to identify the risks you are taking with the SVF and are comfortable with them, then it is a reasonable place to park some cash earmarked for a future condo purchase.
Risk is not a guarantor of return.

Post Reply