These funds go by many names. You may see them called “stable value funds,” “fixed income funds,” “guaranteed investment contracts (GICs),” “capital preservation funds,” “principal protection funds,” “fixed interest funds,” “guaranteed funds,” or “stable interest funds.” No matter what name they’re under, these types of funds can be grouped under a category called stable value funds.
What Are Stable Value Funds?
Stable value funds are composed of investment contracts issued by banks and insurance companies. Each investment contract pays a specified rate of return for a specified time. The objective of stable value is to preserve your capital. Stable value funds give you liquidity while also giving returns that compare to those of short- or intermediate-term bonds. They also have less volatility than those choices.
A Low-Risk Option for Your 401(k)
Stable value is considered a low-risk investment choice. If you are quite conservative, you might choose it for all of your money. If you are concerned about stock market volatility, you might choose it for a part of your money. It may be a good choice if you are within five years of your anticipated retirement date, because it can provide a fixed income with greater returns than money market funds.
A Good Pick for Those Near Retirement
Suppose you are three years away from retiring. You have put together a retirement income plan that shows you that you will need to withdraw $30,000 in the first year after you retire. If you invest that $30,000 in stable value now, you know it will be there when you need it. If the market is down between now and retirement time, it might not matter to you. You know that the amount you need to withdraw is secure in a stable investment choice. You will be a lot less worried about the chance that you’ll lose your money before you need to access it. If you are going to use this option, your 401(k) plan provider must allow you to choose from which investments to take withdrawals. Some 401(k) plans make you take withdrawals pro-rata, which means that they must come proportionately from your various investment funds. That won’t work for this method. To match your investments to your withdrawal needs, you must be able to pick what to sell when it comes time to take money out.
Other Uses for Stable Value
You can use stable value as an opportunity fund. As your growth investments (equities) go up, take the profits and move them into stable value. Then, when the equity market goes down, you can move money from stable value back into growth. But, there is no guarantee this approach will deliver returns any greater than what you’ll get from a strategic asset allocation model. Many investors have made ill-timed choices when trying this. It’s always risky to try to time the market.
Stable Value vs. Bond Funds
For those who will need to make withdrawals soon, the advantage of stable value over a short- or intermediate-term bond fund is lower volatility. In other words, a good return on your investment is the return of your investment. As you get closer to the time you will be taking withdrawals, protecting yourself from loss becomes more important. Stable value funds offer a way to safeguard your money as you approach the time in your life when you will need it the most.
