Most corporate retirement plans are designed for saving, not investing.
This is evident in the number of options that they offer to investors.
It’s common to find about twenty selections because research suggests that if you give people too many choices, they don’t do anything.
In other words, they don’t enroll in the program or allocate their funds appropriately.
Therefore, many plans are limited to one or two fund options in each of the main categories including large cap stocks, mid and small-cap stocks, international equities, and a few bond options.
That’s not all bad, and I’d rather have people limited and participating than not saving at all.
However, this approach can become problematic during changing market conditions like we are experiencing right now, and in many cases, leave your life savings looking rather dreary.
If you look at which investments are working well so far this year, it tends to be specialized groups or sectors that don’t make it into the 10 or 20 fund selections in many corporate retirement plans.
In fact, two areas that we have rotated client money into include short-term bonds and inflation protected bonds.
The reason we have moved funds into these categories is because we are in a rising interest rate market and the cost of living appears to be moving up.
Interest rates are important for bonds because they have what is referred to as an inverse relationship.
Meaning when interest rates go up, bond prices go down, and vice versa.
With the Fed recently raising interest rates and expected to do so three or four more times this year, investors who think all bonds are safe, may be in for a rude awakening.
Bonds come with maturity dates.
They can be short-term like 1-2 years, mid-term, and long-term.
This information isn’t always easy to find in your plan but is worth checking out because longer term bonds are impacted more by rising interest rates.
Whereas shorter-term bonds are less impacted because they mature faster and can be re-invested at higher yields as interest rates go up.
Additionally, with inflation protected bonds, investors make money when inflation, or the cost of living goes up.
Another reason why your retirement account statement could look ugly is because of what has recently been happening to popular technology stocks.
Many people have an S&P 500 index fund in their plan and may think that it equally holds all 500 companies in the index.
But that’s not how it works.
The S&P 500 is considered market cap weighted, so bigger companies carry more weight, and in this case, technology makes up roughly 25% of the index.
Therefore, when technology falls, it can pull the rest of the index down.
So, what can investors do?
To begin, check your bond options in your plan to see if you can move to a fund or ETF with a shorter average maturity, or what is referred to as duration.
If the plan doesn’t offer this info, simply request the ticker symbol for each holding and head over to Morningstar.com and search for it there.
Another consideration is to buy more of what’s falling.
On the surface that can sound and feel scary, but if you are putting $100 into your plan each week, for example, and the fund costs $25 this week, $20 the next week and then $15, the following week, investors are buying more and more shares for less money.
Over time, this lower average price will help when the fund or sectors rebound.
Finally, it’s important to remember that markets go up and down.
The recent increase in market volatility has many people feeling uncomfortable, which is why it’s important to focus on the long term and have a plan in place to avoid emotional decision making.
Retirement today is more about you than your money.
