I'm looking at going down a one-way street and since there is no going back I thought I'd float the idea through the brain trust here for opinions (sorry it got so long... I've been chewing on it awhile).
First let me start with I am an extremely conservative saver. I have the bulk of my 401K in a Stable Value Fund (SVF) and at the peak of the 2008 meltdown I went so far as taking out a 401K loan to get that loan amount out into something "safer" (I also went to Costco and bought canned goods). It doesn't help I just watched the movie "Too Big to Fail" last night...
SVF has been yielding about 3% for the last 10 years (some yield history below if you want to see it).
I haven't owned this fund in a raising interest rate environment, so I have no clue how long it will take for the SVF to start raising its crediting rates... the available graphs only go back 10 years. Since its average maturity is around 3 years, I suspect there is a significant lag when rates go up.
Page 4 of this unverified source graph suggests SVFs have never been in a rising interest rate environment in my investing life time, which started just before the 1987 crash.
http://www2.co.fresno.ca.us/1010/DC...GDCA Presentations/Stable_Value_Funds2492.pdf
On the plus side, this SVF didn't tank during the 2008 collapse (big plus), it is the 4th highest fund YTD that my 401K offers, and based on recent events it is now the top fund available that is at its 52week high... in a ZIRP env it still paid 3%.
On the down side, the SVF has red flags such as "uses derivatives to obtain synthetic exposure and for risk management purposes" that are opaque and sound like financial voodoo. "Wrapped bonds" guaranteed by insurance companies don't sit well after AIG's reckless brush with death. (then there is that clip that showed the bond rating companies (Moody's, S&P, Fitch) testifying before Congress that their ratings were only opinions and thus protected by free speech... not something they could be held accountable for... "If we didn't rate those MBS's as investment grade, they would have taken their business elsewhere".)
The first rule of investing is never buy something you don't understand, which probably restricts me to investing in mattress stuffing.
The idea is to roll about half the 401K into my IRA and then CD it out around 5 years (3.6% today).
My guess/opinion is that interest rates might climb a little higher from here, but I feel fairly sure the economy will be heading back towards 0% life support sooner than later... the long term trend in rates has been downward since the 80's. Meaning I suspect/guess that rates will start going down again around the time the SVF might start raising them.
The one way street is once the money leaves the 401K, it can't go back and I don't see SVF's offered outside of 401Ks.
So what do you think? Is a SVF sought after enough I should hold-my-nose with synthetic derivatives and leave the funds in the 401K in order to access it?
Or is seeking out >3% options elsewhere a viable alternative, with the risk that I'll beat SVF for awhile but then maybe fall behind when rates drop back below 3% (assuming the SVF still holds at ~3%... that pp above suggests changes are afoot in the SVF industry).
Fund details:
The fund may invest in wrapped bonds, a limited amount of unwrapped bonds and cash.For the wrapped bonds, the fund invests in insurance contracts ("wrap contracts").
The fund uses derivatives to obtain synthetic exposure and for risk management purposes, which involves risks such as credit risk.
For wrapped bonds, the wrap contracts allow price changes in the bonds to be smoothed into the crediting rate over time. There is credit risk associated with the wrap issuers.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
4.84% 3.18% 3.89% 3.57% 3.35% 2.88% 2.72% 3.03% 3.08% 3.00%
YTD=2.68%, 1yr=3.01%, 3yr=3.03%, 5yr=2.95%, 10yr=3.19%, Life=5.9% (1985).
Expense Ratio=0.36%
First let me start with I am an extremely conservative saver. I have the bulk of my 401K in a Stable Value Fund (SVF) and at the peak of the 2008 meltdown I went so far as taking out a 401K loan to get that loan amount out into something "safer" (I also went to Costco and bought canned goods). It doesn't help I just watched the movie "Too Big to Fail" last night...
SVF has been yielding about 3% for the last 10 years (some yield history below if you want to see it).
I haven't owned this fund in a raising interest rate environment, so I have no clue how long it will take for the SVF to start raising its crediting rates... the available graphs only go back 10 years. Since its average maturity is around 3 years, I suspect there is a significant lag when rates go up.
Page 4 of this unverified source graph suggests SVFs have never been in a rising interest rate environment in my investing life time, which started just before the 1987 crash.
http://www2.co.fresno.ca.us/1010/DC...GDCA Presentations/Stable_Value_Funds2492.pdf
On the plus side, this SVF didn't tank during the 2008 collapse (big plus), it is the 4th highest fund YTD that my 401K offers, and based on recent events it is now the top fund available that is at its 52week high... in a ZIRP env it still paid 3%.
On the down side, the SVF has red flags such as "uses derivatives to obtain synthetic exposure and for risk management purposes" that are opaque and sound like financial voodoo. "Wrapped bonds" guaranteed by insurance companies don't sit well after AIG's reckless brush with death. (then there is that clip that showed the bond rating companies (Moody's, S&P, Fitch) testifying before Congress that their ratings were only opinions and thus protected by free speech... not something they could be held accountable for... "If we didn't rate those MBS's as investment grade, they would have taken their business elsewhere".)
The first rule of investing is never buy something you don't understand, which probably restricts me to investing in mattress stuffing.
The idea is to roll about half the 401K into my IRA and then CD it out around 5 years (3.6% today).
My guess/opinion is that interest rates might climb a little higher from here, but I feel fairly sure the economy will be heading back towards 0% life support sooner than later... the long term trend in rates has been downward since the 80's. Meaning I suspect/guess that rates will start going down again around the time the SVF might start raising them.
The one way street is once the money leaves the 401K, it can't go back and I don't see SVF's offered outside of 401Ks.
So what do you think? Is a SVF sought after enough I should hold-my-nose with synthetic derivatives and leave the funds in the 401K in order to access it?
Or is seeking out >3% options elsewhere a viable alternative, with the risk that I'll beat SVF for awhile but then maybe fall behind when rates drop back below 3% (assuming the SVF still holds at ~3%... that pp above suggests changes are afoot in the SVF industry).
Fund details:
The fund may invest in wrapped bonds, a limited amount of unwrapped bonds and cash.For the wrapped bonds, the fund invests in insurance contracts ("wrap contracts").
The fund uses derivatives to obtain synthetic exposure and for risk management purposes, which involves risks such as credit risk.
For wrapped bonds, the wrap contracts allow price changes in the bonds to be smoothed into the crediting rate over time. There is credit risk associated with the wrap issuers.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
4.84% 3.18% 3.89% 3.57% 3.35% 2.88% 2.72% 3.03% 3.08% 3.00%
YTD=2.68%, 1yr=3.01%, 3yr=3.03%, 5yr=2.95%, 10yr=3.19%, Life=5.9% (1985).
Expense Ratio=0.36%
