Monday, June 29, 2015

Chasing return

The financial markets are turbulent right now.  Greece is giving European bankers heartburn.  Puerto Rico is giving US bankers heartburn.  And China is giving everybody heartburn.

This is to be a good time to pop over to my 401-k and check things out.

Asset classes

One way to maximize gain and minimize pain (risk) is to invest meaningful percentages in different asset classes.  The hope is that while one sector might be struggling other part of your portfolio is going like gang-busters.  The plan is to rebalance those assets when they become excessively lopsided, thereby automatically harvesting some of the gain from the sectors that are doing well and investing it in sectors that have yet to shine.

This usually works pretty well.  There is much wealth in the world and it gets invested somewhere.  When investors pull assets, en masse,  out of one class (thereby causing the price to drop) they immediately park those assets in another class (causing its price to rise).

Fear and greed

The biggest play is between fear and greed.  When greed dominates, the equities (stocks) are the place to be.  When fear dominates, then bonds are the place to be.  (Minor editorial note:  equities are a bad place to be near the end of the period when greed dominates.  It is a bit like scalping needs to have the tickets in-hand before the demand picks up)

The quandary is that greed has dominated the market for so long that bond funds (hither-to-fore, the safe option) morphed to become more attractive to greed buyers.  They are now juiced up, jazzed up, risked up to increase their appeal.  I fear they lost their functionality along the way.

I used to be able to look at the prospectus for the bond funds offered by my Trust and see a few simple things:  Issuer (Gov or industry), quality (risk as rated by a third party), and duration.  If I was fearful I could buy Gov, high quality, short duration and get a good nights sleep.

Sadly, those days seem to no longer be with us.

My Trust offers 30 options.  The bond options, i.e. the "safe" options that my Trust currently gives me are:
  • Emerging market
  • High Yield (aka, high risk of default)
  • Intermediate Gov (inflation protected, 7 year weighted maturity)
  • Intermediate Gov (50% Euro exposure, 4 year weighted maturity)
  • "Stable value" Income fund (High derivative exposure)
The prospectus for the "Stable value" Income fund does not include information about "duration" or "weighted maturity".  Instead, it has dense thickets of verbiage like this:

The Income Fund invests in a diversified portfolio of high-quality bonds, such as government securities, corporate bonds, mortgage-backed and asset-backed securities, and cash equivalents. The fixed income investments (bonds/bond funds) are paired with investment contracts known as benefit responsive wrap agreements issued by high-quality insurance companies and banks ("Wrap Contracts"). These contracts contain financial obligations intended to protect investors' principal balances from fluctuation resulting from changing market conditions. The wrap contracts smooth return volatility and allow participants to transact at their invested balance plus any accrued interest. Wrap Contract coverage is subject to certain limitations; such as redemptions prompted by plan-level actions (e.g., layoffs, early retirement windows, spin-offs, sale of a division, facility closings, plan terminations, changes in laws/regulations and bankruptcy of the plan sponsor). Distributions resulting from one of these events may (will) be subject to a principal reduction.


The investment contracts and securities purchased for the Income Fund are backed solely by the financial resources of the issuing entities. The portfolio is managed to minimize the risk of principal loss. Although not expected, loss could (will) occur in the event of default of a wrap contract or bond issuer. To reduce the risk of loss, Xxxxxx selects only wrap contract issuers that have been approved by Xxxxx's Credit Research Team, and buys only securities that are rated investment grade and above by national rating agencies such as Moody's or Standard & Poor's. In addition, Xxxxxx conducts its own in-depth securities analysis of bond issuers and financial institutions, and manages the portfolio in accordance with strict credit and diversification guidelines. An investment in the Income Fund is not insured or guaranteed by the manager, the plan sponsor, the trustee, the FDIC, or any other government agency.
For the record, I am approximately 40% "Income fund", 35% Equity Index and 25% Inflation protected bond fund.  I am more concerned about hanging onto the buying power of my savings than I am in wringing every last scintilla of gain out of this bull market.  I am reconsidering where to park my Income fund money because the language of the prospectus gives me the willies.  Based on the dearth of choices in my Trust, I simply do not know where to park it.


  1. I'm looking at options right now too... And NOT happy with the choices... sigh

  2. I'm looking at options right now too... And NOT happy with the choices... sigh


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