What Is a Stable Value Fund?
Let me explain what a stable value fund really is. It's essentially a portfolio of bonds that's insured to shield you from any drop in yield or loss of your principal. As the owner, you'll keep getting those agreed-upon interest payments no matter how the economy is performing.
You'll often find stable value funds as an option in retirement plans like company 401(k)s, particularly for savers who are close to retirement and want to play it safe.
Key Takeaways
- A stable value fund is an insured bond portfolio, ideal for investors with low risk tolerances.
- The insurance makes these funds almost as secure as money market funds.
- They're a common choice in retirement plans, but expect lower yields and higher fees.
Understanding Stable Value Funds
When you look under the hood, stable value funds invest in high-quality government and corporate bonds, both short-term and intermediate-term. They're similar to any other bond fund, but the key difference is the insurance. A bank or insurance company is contractually bound to protect you from any loss of capital or interest.
These bonds are often referred to as 'wrapped' bonds because of that insurance layer. The insurance typically comes as a synthetic guaranteed investment certificate, or GIC.
In terms of safety, a stable value fund is right up there with a money market fund. And historically, they've delivered a bit higher return than money market funds.
Pros and Cons of Stable Value Funds
Stable value funds do exactly what the name suggests: they stay stable. They won't grow much over time, but they won't lose value either.
During recessions or stock market swings, these funds are guaranteed. While other investments might tank, you'll still get your interest payments and never lose your principal, no matter the economic chaos. The insurer has to cover any losses.
That said, the insurance brings extra management costs and fees, which can eat into the already modest yields these low-risk investments provide.
How to Invest in a Stable Value Fund
You can usually find a stable value fund as an option in qualified retirement plans like 401(k)s. It can also serve as a solid alternative to lower-yielding options like money market funds for the part of your portfolio meant to handle market ups and downs. These funds bring the balance and stability you need if your portfolio is heavy on growth investments.
Be careful, though—if you put too much into lower-yielding investments like stable value funds, inflation could squeeze you over time. What seems like enough retirement income now might not cut it as years go by and costs rise.
Most financial advisors I know suggest a mix of safe, low-yield investments and riskier, high-reward ones, shifting more toward safety as you near retirement.
Always check the expenses on stable value funds. They've historically been low compared to most mutual funds, but insurance companies are hiking fees due to market volatility risks.
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