Once again, the investor is at risk. Only now, the risk is coming from the very advice, whether implied or simply offered that conservative investments are the best way to prevent catastrophic losses in your retirement accounts. Its no secret that many folks, reeling from the recent dip in their 401(k) plan balances shifted any and all risk to what they perceived was an almost risk-free investment: the bond.
That honeymoon is about to end and bond fund managers are worried that you will blame them. Bond funds and funds that seek to balance your investments with bonds (balanced funds and target-date funds) are about to feel the pain of rising interest rates. The Federal Reserve has indicated that the days of cheap money are ending. How quickly that will take place is anyone’s guess at this point. But it will come. And the downside recipients of this move will be those who hold debt.
Bonds are essentially loan. You, the bondholder offers money to be borrowed at a rate that provides you some stability. This sort of conservative approach, done by proxy through a bond fund manager, has been sold as the only way to secure a retirement income for the future, even if the retirement income it provides is less than what it would have been had equities been employed – much less in many cases. And they played on human nature, one that reacts in a “once bitten, twice shy” manner which bond fund managers pounced on as the opportunity of a lifetime.
Now, those investors may be bitten again by the very investment strategy they thought would keep them from harm’s way. Diversification is at the heart of what every investor should be doing. Only many investors cannot distinguish between diversification and protectionism. Don Phillips, a managing director with Morningstar recently suggested :“There’s a very legitimate risk that based on the amount of money going into bond funds today, investors don’t fully appreciate the risks they are taking.”
And bond fund managers, in fact all mutual fund managers, worry that if things don’t turn out as expected, they will be held accountable. This is why many bond funds are now attempting to educate you about how markets work without sending you scurrying to equities. Even if equities are the answer in a rising interest rate environment.
At an InvestmentNews mutual fund round table held in New York on February 9th, mutual fund companies discussed the possibilities that the effect of rising interest rates will be blamed on their industry. They have, since the markets began to tumble, suggested that “going conservative” is the best option for investors, no matter what age. And folks bought the argument with gusto, increasing their exposure to this sort of investment in record numbers. Fixed-income investments now make up 30% of the mutual fund market with target-date funds and balance funds adding another layer of exposure that most investors did not previously have.
Some company 401(k) plans have shifted so dramatically, the result of a revamping of investments, that the choices might be too limited for investors to make adequate shifts. David McSpadden, senior vice president of global client marketing for Franklin Templeton worries that even if fund companies made a serious effort at changing this sort of midset, “[clients] were not interested in having a conversation about it”.
The effect of rising interest rates will lower the returns expected by investors possibly causing yet another panic. Fund managers are worried that their efforts at luring investors will be blamed instead of what is occurring beyond their control. But they should have seen this coming. And because they know the markets well enough to have predicted this next event, their silence (and reluctance to talk about it previously) are telling.
Balanced funds may feel less pain than any other part of this future change in fixed-income fortune. The managers of these funds attract a certain kind of investor who realized that diversity is something that is very difficult to achieve.
Balanced fund managers also tend to have a longer track record than target date fund managers and therefore could do better at weathering any future storm. Target date funds tend to be made up of miscellaneous investment funds, some orphaned, that suggest a more conservative approach but instead, have no real track record of success in getting the investor where they would eventually like to be. While fixed income is squarely in the cross-hairs of this impending downturn, target date funds will feel the pressure more.
Now is the time to make your move. The run in the fixed income markets is about to sunset and if you wait too long, you will feel the bite of a risk you were unprepared to take. And you will blame the bind fund manager for it.
Related posts:
