Stable Value Funds in Rising Rate environment

[RE2Boys]

With all the threads concerning investing in bond "funds" in a rising rate environment, was wondering what the community thoughts were concerning stable value funds. Recently my son started a new job and signed up for the 401k plan and had to make investment decisions and solicited my thoughts.

Even though he is 26, he has noted that his Roth IRA (he's had a Roth since he was 18), invested in Wellington fund and VTI, has taken a hit in the past year and feels that investing is a losers game. He did note that of his investment choices, the stable value fund was the only one that had not lost money in 2022. My recommendations were to contribute enough to get the full company match (50% up to 9%), fully contribute to his Roth outside the company yearly, and invest the 401k money 50% stable value fund and 50% S&P 500 fund.

Seeking thoughts on continuing to invest in a stable value fund in the current environment. Thanks in advance.

[sengsational]

Everyone has their own risk tolerance, but if I could give my 26 year old self advice, it would be 100% equities, and never panic out of the market because your spending money comes from work.

If he's going to use the money for a house down payment or something, then a SVF is great! Although SVF's are only in 401k's, typically, you can still make the down payment work. You fund the external Roth with equities, and the 401k with equities and the down payment bucket as SVF. When it's time to buy the house you sell the external Roth equities while concurrently buying those same equities in the 401k with the SVF money. The asset allocation remains unchanged (you didn't "sell low"). So it doesn't matter a lick whether the market is up or down at the time of the house buy.

[karluk]

Stable value funds will always be an inappropriate investment for a 26 year old's retirement savings. But it's an even worse mistake for him to put money into a stable value fund in a rising interest rate environment. It's likely that the yield on the stable value fund is much lower right now than the yield of comparable fixed income investments.

As an example, consider my own tax deferred account. It has three fixed income options - stable value, money market and FDIC insured savings. Almost all of the time the stable value fund offers the best yield. But right now it's completely reversed. The money market fund has a 4.2% yield, FDIC savings yields 3.8%, and the stable value fund is only yielding 2.2%. The money market started yielding more than the stable value fund last summer, and the gap has widened every month since then due to the repeated rate increases by the Federal Reserve.

The underlying problem is that most of the bonds held by the stable value fund were purchased when interest rates were much lower and that money is tied up until the bonds mature. I expect that to take at least another year, possibly two. In the meantime, I have moved all of the money that used to be in my stable value fund into the money market. I'm avoiding stable value funds for now, and probably your son should do likewise. Hopefully you can convince him to invest in more age appropriate investments, in spite of his concerns about market risk.

[OldShooter]

You might try giving him this: https://www.etf.com/docs/IfYouCan.pdf Your son's age group is Bernstein's target market for this free paper.

[RobbieB]

Yeah, at age 26, 100% equities and max it out. Buy now while the price is low.

In 20 years he'll be "I'm sure glad I didn't do that stable value stuff"

[Dtail]

Quote:

Originally Posted by RobbieB Yeah, at age 26, 100% equities and max it out. Buy now while the price is low. In 20 years he'll be "I'm sure glad I didn't do that stable value stuff"

Agree.
When retired, the Stable Value fund if having good yields, can be a nice investment as part of the fixed income portion of the portfolio.

[mrfeh]

Quote:

Originally Posted by sengsational Everyone has their own risk tolerance, but if I could give my 26 year old self advice, it would be 100% equities, and never panic out of the market because your spending money comes from work.

+1000

The OP's son needs to spend some time educating himself and realize that whatever happened the last year has very little bearing on portfolio value decades from now.

[jollystomper]

I will take a slightly contrarian view. From the time I started my 401K at age 26, a stable value fund has been part of the 4 funds in my 401k (along with large, small/midcap, and international). While in the early years it was a very small percentage (maybe 5%), I looked at it as my "bond" allocation at the time. nearly 40 years later, I do not think it hurt me. The average annual return for the last 18 years has been over 3% (I have the data for earlier years, too lazy to calculate and it was a much lower percentage of my 401K back then), so I am fine with it being a good "floor" to suit my volatility tolerance.

More important for me was maximizing my contribution to get the best company match, that covered a multitude of sins .

So, in my view, position it as "even if you do not need it now, keep it in mind, as you get a better handle on your risk tolerance". Perhaps also show him the Callan Periodic Table of Investment Returns as part of his financial education.

[arcyallen]

There are two issues at hand:

1) A stable value fund is just that - stable. It's not made to gain, it's made to not lose. If someone's goal is to absolutely not lose money, this will do the job regardless of "the current environment". It's a great tool for that purpose. But that's not likely to be your son's long term goal.

2) Your son is in a time in his life where it will be EXTREMELY valuable to learn more about investing and the markets. His current risk tolerance is so low that he'll likely struggle to achieve his savings goals. If he reads up on the basics of investing, and a rough history of the markets, he will very likely be more comfortable with stock investing. If he can't get there himself, he would likely benefit from getting some professional help. Just telling someone "You should be in stocks!" doesn't help. He needs to be comfortable with any likely outcomes, and if he just jumped into stocks now without changing his perspective he'll get double-burned when the next downturn occurs. He'll lose money AND get scarred.

Quote:

Originally Posted by RE2Boys My recommendations were to contribute enough to get the full company match (50% up to 9%), fully contribute to his Roth outside the company yearly, and invest the 401k money 50% stable value fund and 50% S&P 500 fund.

I think maxing his match is great advice. As a stopgap until he gets more comfortable I'd recommend ONE fund that's relatively conservative that won't see big drops. As it is now, when the next drop occurs he'll see the stable value fund doing great and hate the S&P fund even more. The temptation post-drop to move into all SVF will be too great. As where if he has a conservative fund the fluctuations will be muted, and from a behavior standpoint he'll hopefully stay the course until the gets a better grasp of investing.

[dmpi]

I've been through the 1987, 2000, and 2008 market crashes. That's when you really learn what your 'risk tolerance' is. Not everyone is cut out to be a 100% equities person. It's a bad strategy if you're going to end up dumping after a crash. Everyone needs to find their own level.

[RE2Boys]

Quote:

Originally Posted by jollystomper I will take a slightly contrarian view. From the time I started my 401K at age 26, a stable value fund has been part of the 4 funds in my 401k (along with large, small/midcap, and international). While in the early years it was a very small percentage (maybe 5%), I looked at it as my "bond" allocation at the time. nearly 40 years later, I do not think it hurt me. The average annual return for the last 18 years has been over 3% (I have the data for earlier years, too lazy to calculate and it was a much lower percentage of my 401K back then), so I am fine with it being a good "floor" to suit my volatility tolerance. More important for me was maximizing my contribution to get the best company match, that covered a multitude of sins . So, in my view, position it as "even if you do not need it now, keep it in mind, as you get a better handle on your risk tolerance". Perhaps also show him the Callan Periodic Table of Investment Returns as part of his financial education.

OP here. Thanks to all who responded! I was hoping that the discussion would center on stable value funds in the current environment (hence the title of the thread). And am dismayed that most folks focused on the asset allocation issue. I must have asked the wrong way.

My recommendation was based on educating my son on different asset vehicles how they perform over time and , above all, the importance of diversification in investing. Rather than invest in bond funds, the stable value fund provides some diversification and ballast to his overall retirement portfolio. His Roth combined with his previous employer's 401k has him about 75+ percent in equities.

Soon we will have the discussion as to moving his old 401k to a TIRA and what to invest it in. He is not particularly interested in monitoring his investments and spending time on this issue. Since he has a good six months living expenses saved up in an on-line saving account, I'm urging him to increase his yields safely also.

[OldShooter]

Quote:

Originally Posted by RE2Boys OP here. Thanks to all who responded! I was hoping that the discussion would center on stable value funds in the current environment (hence the title of the thread). And am dismayed that most folks focused on the asset allocation issue. I must have asked the wrong way. ...

Oh, IMO question was clear. I think your responses, including mine, were implicitly and WADR suggesting that you were asking the wrong question. IMO, anyway, there is no way to optimize the use of a Stable Value fund in such a young man's portfolio. I am in the camp suggesting that DS needs education and experience enough to understand that market fluctuations go with the investment territory and should not be a source of worry.

Quote:

Originally Posted by dmpi I've been through the 1987, 2000, and 2008 market crashes. That's when you really learn what your 'risk tolerance' is. Not everyone is cut out to be a 100% equities person. It's a bad strategy if you're going to end up dumping after a crash. Everyone needs to find their own level.

Agreed, sort of, but IMO risk tolerance is not a fixed thing. Particularly for those who seem to have a low risk tolerance I think the objective should be, yes, to find it but then to increase it. A very low investing risk tolerance is a really expensive thing to maintain.

[Al18]

Quote:

My recommendations were to contribute enough to get the full company match (50% up to 9%), fully contribute to his Roth outside the company yearly, and invest the 401k money 50% stable value fund and 50% S&P 500 fund.

Sounds like a good plan. He can check on the balances on a yearly basis and after 3 years, decide if he wants to make any changes.

[freedomatlast]

From personal experience over 4 decades, I remember some young coworkers that invested their 401Ks mainly in stable value funds with little or nothing in equity funds. They were terrified of any risk in both investing, and in their personal lives as well. They were happiest in down market years, but I don't ever remember any of them retiring early. In fact most are still working well into their mid sixties, driving older cars, wearing older clothes and hesitating to embrace new technologies. YMMV.

[Dtail]

Quote:

Originally Posted by RE2Boys OP here. Thanks to all who responded! I was hoping that the discussion would center on stable value funds in the current environment (hence the title of the thread). And am dismayed that most folks focused on the asset allocation issue. I must have asked the wrong way. My recommendation was based on educating my son on different asset vehicles how they perform over time and , above all, the importance of diversification in investing. Rather than invest in bond funds, the stable value fund provides some diversification and ballast to his overall retirement portfolio. His Roth combined with his previous employer's 401k has him about 75+ percent in equities. Soon we will have the discussion as to moving his old 401k to a TIRA and what to invest it in. He is not particularly interested in monitoring his investments and spending time on this issue. Since he has a good six months living expenses saved up in an on-line saving account, I'm urging him to increase his yields safely also.

Re Stable Value Funds - moving an old 401k account to a TIRA is sometimes not the best choice due to having access to the SVF in the 401k, but not in a TIRA.
If I had known earlier about the general ballast type value of an SVF, I would have moved more of my TIRA into a 401k account. This would have allowed me to have more flexibility with my SVF allocation vs. Equities over time.
My 401k also had the Vanguard low cost index funds, so wasn't losing any choices of equity funds either.

[prudent_one]

Everything I've read about SVFs is that the rates are slow to rise and slow to fall. In today's environment of rising rates, doesn't seem logical to put money in them. I know our 401k plan has restrictions on moving money in/out of the SVF (can't put money in for a year after you take money out).

[GenXguy]

Stable value fund is a sore topic for me. We had one at work where the rate was 3% for a decade. I moved a lot into back before the pandemic when inflation was less than that. Then they suddenly changed it to around 1.3% (net with fees). And they didn't even notify anyone. I had to go into my account and discover this myself. Ironic - just as inflation skyrockets, they cut our rate! Anyway, biggest regret. I've moved some back out to stock funds when the market dropped 15% and 20% from highs.

[Koolau]

Quote:

Originally Posted by jollystomper I will take a slightly contrarian view. From the time I started my 401K at age 26, a stable value fund has been part of the 4 funds in my 401k (along with large, small/midcap, and international). While in the early years it was a very small percentage (maybe 5%), I looked at it as my "bond" allocation at the time. nearly 40 years later, I do not think it hurt me. The average annual return for the last 18 years has been over 3% (I have the data for earlier years, too lazy to calculate and it was a much lower percentage of my 401K back then), so I am fine with it being a good "floor" to suit my volatility tolerance. More important for me was maximizing my contribution to get the best company match, that covered a multitude of sins . So, in my view, position it as "even if you do not need it now, keep it in mind, as you get a better handle on your risk tolerance". Perhaps also show him the Callan Periodic Table of Investment Returns as part of his financial education.

Yes, I always had some SVF exposure and it gave me confidence to be more aggressive when I was young. Nor did I really know what I was doing at 26. Now that I'm old and don't need to grow my stash (except for inflation) I have a fair amount in my SVF. It's not for everyone, but it has its place - even for a 26 yo who is not yet sure of his own investing philosophy. It's only MHO so YMMV.

[karluk]

As I pointed out earlier in this thread, stable value funds are poor investments right now - no growth potential and below market yields. For the sake of completeness, I should also mention another big negative that I had to deal with last year - trading restrictions that make it difficult to move money out of a stable value fund. My stable value fund enforces something called a 90 day "equity wash rule". This rule prohibits direct transfers to competing fixed income investments like money market funds. Instead one has to transfer the money in the stable value fund to a stock or bond fund and be exposed to market risk for 90 days before transferring the money to the money market fund.

The equity wash rule is designed to discourage investors from abandoning the stable value fund during periods of rising interest rates like the present, and in general it works fairly well. It's too much bother to make the transfer for small differences in yield. But right now money markets are offering almost twice the yield of the stable value fund, and that's worth some inconvenience to fix.

The way I navigated the equity wash rule without increasing my market risk was to use my Roth IRA. I would buy (for example) an S&P500 index fund from the stable value fund and simultaneously sell the same amount of an S&P500 index fund in my Roth IRA into a money market fund. Messy, but it got me past the the 90 day equity wash. I completed the transfer in late October and can now enjoy the improved yield for as long as it lasts.

[Koolau]

Quote:

Originally Posted by karluk As I pointed out earlier in this thread, stable value funds are poor investments right now - no growth potential and below market yields. For the sake of completeness, I should also mention another big negative that I had to deal with last year - trading restrictions that make it difficult to move money out of a stable value fund. My stable value fund enforces something called a 90 day "equity wash rule". This rule prohibits direct transfers to competing fixed income investments like money market funds. Instead one has to transfer the money in the stable value fund to a stock or bond fund and be exposed to market risk for 90 days before transferring the money to the money market fund. The equity wash rule is designed to discourage investors from abandoning the stable value fund during periods of rising interest rates like the present, and in general it works fairly well. It's too much bother to make the transfer for small differences in yield. But right now money markets are offering almost twice the yield of the stable value fund, and that's worth some inconvenience to fix. The way I navigated the equity wash rule without increasing my market risk was to use my Roth IRA. I would buy (for example) an S&P500 index fund from the stable value fund and simultaneously sell the same amount of an S&P500 index fund in my Roth IRA into a money market fund. Messy, but it got me past the the 90 day equity wash. I completed the transfer in late October and can now enjoy the improved yield for as long as it lasts.

Heh, heh, where there's a will, there's a way. Good thinking.

The SVF in my 401(k) has a 90 day rule on transferring out and then transferring back in. Never an issue to me. Seems SVFs have a lot of rules.