Capital preservation is a priority for many retirement investors, especially those who are in retirement or are nearing the end of their working years. Plan participants who experienced the sharp market downturn in 2008 may be particularly wary of market turbulence and may seek alternatives designed to protect their portfolios from losses. However, capital preservation cannot be guaranteed. Even if participants are attracted to a frothy stock market, advisors know that stock indexes have climbed to historic records, leaving plenty of possibilities for declines.
If plan sponsors ask about the relative “stability” of bonds as they construct fund lineups, there are known risks there, too. Bonds have had a long rally when interest rates have fallen. Most economists think rates will continue to rise as economic growth picks up, causing bond values to fall. Bonds also come in different flavors, some with more interest rate and credit risks than others. Both stable value funds and comparable-quality bond funds are generally backed by higher–quality, investment-grade bonds. But what about the impact of interest rates on comparable-quality bond and stable value funds?
