Welcome to a very difficult time for 401 K plan investors. Generally speaking, company 401 K plans have two different types of investments as options for investments. They have either stock funds or bond funds. From a diversification standpoint, that can usually work, considering that bonds are usually considered a safe haven when stocks go down in value. In other words, they generally don’t both move in the same direction.
What if bonds and stocks are both losing money? What if bond funds are losing almost as much as stocks? I looked in history to find that bonds and stocks have lost money at the same time only 4% of the time. Further, we are looking at the bond market having its worst year in history.
What is the solution? First of all, there may not be a good solution at all. It depends on the 401 K plan. I have seen some pretty awful ones. If you are lucky, you have potential bond fund substitutes. These aren’t guaranteed to be the solution. However, they offer a higher probability of not losing money.
Money Market Funds – Most plans have a money market fund. Money market funds have been making 1 to 2% in interest. Then, some are still making hardly anything. They are supposed to not lose money. Yet, anything is possible.
Stable Value Fund – These work like a money market fund. However, they can make more than a money market fund. Once again, they are supposed to not lose money. Yet, anything is possible.
Yes, I know it is unusual to think of a money market fund as a bond substitute. Sometimes it is more about looking for a place with a low probability of losing money. After all, that is what most investors thought they were doing with bonds.
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