Are you afraid of losing money in the stock market?
Lots of 401(k) participants are terrified of losing money after the 2008 credit crisis. The very unhumorous joke was your 401(k) is now a 201(k). Fear of losing is the only conclusion that I can come to when I see so much money parked in low risk, low yielding choices like a stable value investment.
Why else would investors be willing to accept 1 percent on a large portion of their retirement assets?
Here are some reasons 401(k) participants might want to reconsider their decision:
1. Ridiculously low returns. As I mentioned, some participants are getting 1 percent on a large portion of their retirement assets, if not the entire balance. Even when interest rates start to rise, stable value accounts will not rise lockstep with interest rates. So you'll be getting these abysmal returns for some time to come. That's nothing compared to the long term returns of stocks over time.
2. Guaranteed... to lose money after inflation. What do you mean, I'm losing money in a guaranteed investment? Yep, after just inflation at 3 percent you are in the hole by 2 percent. Your fixed return that you prize has just set you back after factoring in inflation.
3. You'll never be able to retire on these returns. The rule of 72 shows us just how long it will take to double your money. You simply divide your return by 72. With stable value accounts at the floor minimum of 1 percent, it doesn't take a math genius to figure out 72 years! You'll be dead first!
4. It may be screwing up your asset allocation. You should probably never have all your eggs in one basket, right? Why would you put all your money in a low yielding investment and nothing else? If you have decades before retirement, then why on earth would you allow your money to marinate at 1 percent for all these years? You'll have more than enough time to make up for any market declines.
So those of you placing a large chunk of your 401(k) money in stable value investments are either scared to death to lose it, or just have not been educated on the long-term returns of a diversified portfolio.
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