Author Topic: Stable Value VS Index Funds  (Read 463 times)

keys138

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Stable Value VS Index Funds
« on: August 01, 2018, 08:16:40 AM »
Hi, first time poster here.

Without going into the whole case study thing, I'm trying to decide whether or not to move my IRA over to a stable value fund that returns ~3.5% net of fees. I realize that I'm going to miss out on the ups in order to avoid the downs and have the money available when I need.  I'm looking at needing access to the money in about 7.5 -10 years (its a 457 fund so I'll have access at separation of employment, not at age) to bridge living expenses until my pension kicks in and then serve as a small income generator.  Currently I have about $190k in the fund and I will be adding about $18.5k each year until retirement.

This question has made my financially "savvy" friends' heads explode since they're not exactly on the FIRE kick. 

Thoughts?

MustacheAndaHalf

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Re: Stable Value VS Index Funds
« Reply #1 on: August 01, 2018, 10:52:11 AM »
Right now the 10 year Treasury earns 2.9%, which is the same as how much consumer prices have risen in the past 12 months.  In other words, earning about 3% is breaking even.  The stable value fund you mention only yields +0.6% over inflation.
Do you want to build your retirement +0.6% at a time?

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) has averaged +12.1%/year for 3 years.  Over the long term, you will work many more years investing retirement savings in a stable value fund than if you capture the market return.
Can you split your investment into half S&P 500 (the biggest public companies in the U.S.) and half stable value fund?  If you like the S&P 500 more over time, switch to it.

keys138

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Re: Stable Value VS Index Funds
« Reply #2 on: August 01, 2018, 02:12:23 PM »
Thanks for the input, I appreciate the outside perspective!

I’m heavily diversified now (10% stable value, 25% bond, 75% equities) and I think what I’m afraid of is having a poorly timed market correction that ends up pushing my plans back (a common fear, I know).  It’s one of those “bird in the hand, two in the bush” things.  If my pension is going to provide most of my post-employment income, I’m not sure how much I should value potential growth over stability. 

Does that make sense?

robartsd

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Re: Stable Value VS Index Funds
« Reply #3 on: August 01, 2018, 02:53:20 PM »
Thanks for the input, I appreciate the outside perspective!

I’m heavily diversified now (10% stable value, 25% bond, 75% equities) and I think what I’m afraid of is having a poorly timed market correction that ends up pushing my plans back (a common fear, I know).  It’s one of those “bird in the hand, two in the bush” things.  If my pension is going to provide most of my post-employment income, I’m not sure how much I should value potential growth over stability. 

Does that make sense?
Since you'll have a pension for the rest of your life that starts a fixed time period after your retirement, I agree that stability over growth from retirement until pension age makes some sense.

However, during accumulation, you could go with a growth portfolio and risk a bad sequence of returns just before your planned retirement delaying your plans, or you can choose a stable fund and guarantee delaying your plans. I'd choose the former. If the average nominal returns on your portfolio are 8%, choosing a safer 3.5% nominal returns instead results in your 7.5-10 years becoming 11-15 years. I'd work out an IPS that uses a glide path (either as a function of time or as a function of % of needed assets) that will move you towards your desired retirement allocation gradually as you reach your goal.

keys138

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Re: Stable Value VS Index Funds
« Reply #4 on: August 02, 2018, 07:48:38 AM »

That makes a lot of sense.  A gradual glide-path should put me where I hope to be in the proper time horizon.  I need to take the time to hammer out a formal IPS anyway.  I get whipsawed around by whichever idea-sphere I'm reading about at the time.  Lately it's been a lot of Taleb and his ideas of "it doesn't matter what the historical returns are, if there's a reasonable chance of a wipeout."

Retire-Canada

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Re: Stable Value VS Index Funds
« Reply #5 on: August 02, 2018, 08:22:50 AM »
Keep in mind that if you get an average market return for 7.5 years [say 7% after inflation] you'll end up with a 70% return on the initial investment and then just before you want to use that money the market crashes 40% you end up with a 2% return. A shitty return for 7.5 years of investment, but not exactly terrible compared to the stable value fund performance given that you also have the possibility of having a lot more money when you retire with the index fund.

keys138

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Re: Stable Value VS Index Funds
« Reply #6 on: August 02, 2018, 10:54:16 AM »
That’s might be the perspective I needed.  It’s a struggle to take the long view sometimes, but if a poorly timed downturn doesn’t fully wipe me out (or just results in lower than expected returns) the potential upside is pretty huge and not one I’d like to miss out on.

 Thanks for the replies!

neil

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Re: Stable Value VS Index Funds
« Reply #7 on: August 02, 2018, 12:20:39 PM »
Stable value funds aren't low risk in the same way we think of savings accounts or government debt (effectively insured by an entity that can print money) as low risk.  My company's offering broke in the crisis and lost 30% in the end - basically 6 years of ~5% returns gone for what was thought of as a no-risk product thanks to the name.  (I don't recall exact details as I was 100% stock at the time anyway.)

This is a fair assessment of what they are:
https://institutional.vanguard.com/iam/pdf/ICRSVF.pdf?cbdForceDomain=false

They probably aren't terrible products, but I don't see the need for insurance in my investments.  You can get low duration bonds for 2% right now and the fixed income portion of my portfolio is designed to be my preferred source of income in the case that stocks get hammered.  Yes, the bonds can fall too, but historically much less.  I am okay with that.  I have no idea what the track record is for stable value fund insurance companies.  (It also seems like a pretty good deal for them - collect premiums and all outperformance during normal times and fold during a crisis.)

In fact our current SVF is only returning ~2% right now and claims it is made up of this (with 20% unknown):
Top 10 Holdings 3 
AS OF 6/30/2018

81.60% of Total Portfolio

Managed Synthetic 20.18%
Managed Synthetic 17.75%
Indexed Synthetic (Blackrock) 16.26%
Indexed Synthetic (Blackrock) 14.96%
Fixed Maturity Synthetic 12.46%

Since my IPS doesn't include synthetic anythings in my allocation, I pass.  I can get 2% with short term treasuries, why would I own this? 

Laserjet3051

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Re: Stable Value VS Index Funds
« Reply #8 on: August 02, 2018, 12:52:31 PM »
I never invest in things I don't understand. I attempted on several occasions, through extensive discussion with Voya, to understand exactly what their Stable Value Fund was invested in, and to appreciate the risks (and rewards) associated with those underlying investments. It was an impossible task, no matter how much I pressed, I was unable to get detailed information. Hence, it was a no go with that Stable Value Fund.

Maybe, equally important, was the fact that this Stable Value Fund failed to hit it's target return rate, for multiple consecutive quarters, not even close.

Maybe other firms have better stable value products?

keys138

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Re: Stable Value VS Index Funds
« Reply #9 on: August 03, 2018, 01:42:07 PM »
I’m trying hard to parse the the fund.  It looks like a few treasuries and a ~40% chunk of corporate bonds with a mix of mortgage backed securities and asset backed securities.  Which make me go “ehhhhhh...”.

Because the provider is MassMutual, they guarantee the principal, but I imagine all bets are off in a Great Recession scenario.  Because of the “guarantee,” the historic 10 year return is about 4.5%.

Laserjet3051

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Re: Stable Value VS Index Funds
« Reply #10 on: August 03, 2018, 01:47:19 PM »
4.5% sounds very high for a SVF. Does the trailing 1 year return support this claim?

keys138

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Re: Stable Value VS Index Funds
« Reply #11 on: August 03, 2018, 02:00:19 PM »
I was a bit optimistic, looks like ~4.1%. 
Here’s the info:
http://wwwrs.massmutual.com/retire/pdffolder/rs4711.pdf

Radagast

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Re: Stable Value VS Index Funds
« Reply #12 on: August 03, 2018, 02:55:44 PM »
Don't forget, dollar cost averaging is already an effective tool for reducing risk. Here is a Portfolio Visualizer link to an investment of $1,000 per month into VTSMX beginning January 1, 2000 and ending December 31, 2010. Most people would agree this was the most terrible time for investors decades, but in reality steady monthly contributions returned 4.58% on money invested. If you had used 75% VTSMX, 25% intermediate term treasuries your money would have earned 5.58%. Again, this was one of the worst periods in recent history. On average you can expect to do much better. I recommend generally remaining mostly invested in stocks, with a small percentage in bonds for rebalancing and money that you *need* on a specific date.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2000&firstMonth=1&endYear=2010&lastMonth=12&endDate=08%2F02%2F2018&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTSMX&allocation1_1=100&allocation1_2=75&symbol2=VFITX&allocation2_2=25