Are Stable Value Funds For You?

Investing can be tricky, and tricky could mean costly. Stable value funds are designed to provide a steady return on investment while helping to minimize risk, making them an attractive option for many investors. 

Let’s take a detailed look into these investment tools so you can make informed decisions on whether to include them in your portfolio.

What Are Stable Value Funds?

Stable value funds are investment options that seek to provide a steady return on investment while minimizing risk. They are typically a combination of fixed-income securities, such as bonds, and other assets designed to help reduce risk. These assets may include options contracts, futures, and other derivatives. Stable value funds aim to provide investors with a steady, predictable return on their investment while helping to minimize the risk of losing money.

Stable value funds, such as 401(k)s, are commonly included in retirement plans and can also be purchased as standalone investments. However, the Plan Sponsor Council of America reports that more than 30% of retirement plans do not offer stable value funds as an investment option. If you seek stable value funds within your 401(k) plan, knowing they may be listed under different names is crucial. Be on the lookout for funds with names that imply concepts such as:

  • Capital accumulation funds
  • Principal protection
  • Guaranteed funds
  • Preservation funds
  • Guaranteed investment contracts (GICs)
  • Group annuity contracts

Let’s look at some of the pros and cons of stable value funds.

Pros of Stable Value Funds:

1. Steady Returns

Stable value funds help provide investors with a valuable benefit: the potential for steady returns. This is made possible by the fund’s investment strategy, which involves diversifying your portfolio with fixed-income securities such as bonds. These securities are chosen based on their ability to generate a predictable and stable return, which can be reassuring for investors seeking a low-risk investment option.

The consistency of returns offered by stable value funds can be particularly appealing to investors looking for a reliable source of income or who want to avoid the volatility often associated with other types of investments, such as stocks. With a stable value fund, investors can expect a more consistent return over time, which can help to mitigate the impact of market fluctuations on their overall investment portfolio.

2. Low Risk

Another advantage of stable value funds is that they are considered low-risk investments. They are typically invested in high-quality, short-term fixed-income securities less volatile than stocks or other investments. As a result, stable value funds are less likely to experience significant fluctuations in value, making them a popular choice for risk-averse investors.

3. Capital Preservation

Stable value funds are designed to help preserve capital. Meaning investors can expect to recover their initial investment. This is achieved by investing in high-quality securities specifically chosen for their ability to hold their value over time. They are often a good choice for investors looking to help preserve their capital while still earning a reasonable return on their investment.

Investing in high-quality securities with a low risk of default, stable value funds can offer investors protection not typically found in other types of investments. This can be particularly appealing to investors looking for a low-risk way to grow their savings over time without worrying about the ups and downs of the stock market.

Cons of Stable Value Funds:

1. Limited Returns

Although stable value funds provide a more steady and predictable return on investment, there are some potential downsides to consider. One of the primary cons of stable value funds is that they may offer limited returns compared to other investment options. This is because stable value funds are designed to be low-risk investments, which may provide less growth potential than other higher-risk investments.

Stable value funds typically provide lower returns than other investment options such as stocks or mutual funds. As a result, investors who are looking to help maximize their returns may need to consider alternative investment strategies.

2. Limited Liquidity

Another downside of stable value funds is that they may be less liquid than other investments. This is because stable value funds typically invest in fixed-income securities that may restrict when they can be sold. As a result, it may be more difficult to access your funds if you need them.

Unlike other types of investments, such as stocks, stable value funds may have more extended lock-up periods or withdrawal restrictions. This means that if you need to access your funds quickly, you may be unable to do so without incurring penalties or fees. As a result, stable value funds may not be the best choice for investors who require more liquidity in their investment portfolio.

3. Limited Diversification

Finally, stable value funds may offer limited diversification compared to other types of investments. This is because they are typically invested in a combination of fixed-income securities and cash equivalents, which may provide a different level of diversification than a portfolio that includes stocks, bonds, and other investments.

Stable value funds are available to 401(k) participants and those with other defined contribution plans like 457s and 403(b)s.

Because of regulatory rules and the uniqueness of contracts, this asset class is unavailable to participants with individual retirement accounts (IRAs). So if you roll over assets from a 401(k) to an IRA, you will no longer have access to stable value funds. (If you’re saving for your family’s education, stable value funds are available in 529 college savings plans.)

Is a Stable Value Fund Right for You?

Whether or not a stable value fund is the right investment option depends on your financial goals and risk tolerance. A stable value fund may be worth considering if you’re looking for a low-risk investment option that provides a steady return on investment. However, other investment options may be better if you want higher returns or greater flexibility in your investment portfolio. As with any investment decision, it’s essential to research and consider your options carefully before deciding. Consulting with a financial advisor can also help determine the best investment options for your needs and goals.

Working With a Financial Advisor

Johnson Wealth and Income Management is dedicated to helping retirees achieve financial success. Making sound decisions when planning for retirement is essential to achieving your financial goals and avoiding costly mistakes that could negatively impact your future. As a financial professional, Fiduciary Matthew P. Johnson and his team are committed to helping individuals like you find solutions for their retirement assets.

Although today’s economic environment presents challenges, it also provides opportunities for potential rewards. We work closely with our clients to evaluate these opportunities and position ourselves to reap the benefits. We take pleasure in helping our clients establish a solid financial foundation for their future.

Final Thoughts

Stable value funds can be an attractive investment option for those looking for a low-risk, steady return on investment. They offer a range of benefits, including regular returns and capital preservation. Whether or not stable value funds suit you depends on your financial situation. We hope this article helped you in making that decision.

At Johnson Wealth and Income Management, we conduct a thorough assessment of your investment options to help minimize your level of risk. If you want to learn more about our investment services, please contact us today to schedule a complimentary strategy session.



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