Earn More From Your Retirement Savingshttp://www.fool.com/personal-finance/retirement/2007/07/11/earn-more-from-your-retirement-savings.aspx Dan Caplinger
July 11, 2007
Income investors constantly search for the best yields they can find. At the same time, they have to be careful not to take on risk that will threaten their entire investment.
In comparison to the returns on stocks -- especially lately -- no short-term savings investment looks very attractive. But if you need stability in your portfolio, putting everything you own into stocks isn't the best idea. Any investor who has weathered the storm of a bear market knows that diversification into other assets, such as bonds, can help smooth losses during market downturns.
Bonds, however, come with their own risks. As many investors have seen recently, rising interest rates can wreak havoc with the value of your bonds. Those who chose not to lock up their money in longer-term bonds have avoided much of the damage, but short-term savings vehicles typically pay significantly lower yields than their longer-term counterparts.
Enter stable value
Stable value funds hold a variety of fixed-income investments, including bonds and guaranteed investment contracts purchased directly from corporate issuers such as banks and insurance companies. You'll most often find stable value funds as investment options within institutional plans, such as employer-sponsored 401(k) plans or state-sponsored 529 college savings plans. In addition, some mutual funds make stable value funds available to general investors.
What's the catch?
The reason why stable value funds aren't more popular may stem from problems in the 1980s. As junk bond financing became popular, several large insurance companies offered guaranteed investment contracts to stable value funds within retirement plans. Some of them, including Mutual Benefit Life and Executive Life, later failed, tying up participants' money in court proceedings for extended periods of time. Theoretically, investors in stable value funds could lose principal if the funds held investments that went into default.
However, just as no money market mutual fund has ever passed on losses to its investors, it would be suicide for stable value funds not to make their investors whole in the event of a financial loss. Nevertheless, history gives a valuable reminder that the guarantee of an insurance company, while having some value, isn't the same as the protection of FDIC insurance or backing by the U.S. Treasury.
Not a bad choice