Should You Move Your 401(k) to 'Safe' Investments?

Money market funds may seem safe, but there are hidden risks.

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We’ve had quite a roller coaster ride in the stock market so far in 2011. From the highs earlier in the year, we experienced a horrible third quarter, followed by one of the best Octobers on record for the S&P 500, followed by what is shaping up to be quite a volatile November. There is much talk in the financial press about this “safe haven” or that one. My question is: safe from what?

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Your first reaction might be, “This guy’s nuts; I don’t want to lose any more of my retirement savings.”  Makes sense, and I get that. Not losing money is a good thing. But should it be your overriding goal, especially in the short-term?

There are countless tragic tales of investors who got out of equities in their 401(k) plan and elsewhere near the bottom of the 2008-09 market decline, only to see the stock market turn around in March of 2009 and stage a tremendous two-year rally. In addition to booking some horrendous losses, they didn’t give themselves a chance to recover from them.

The safest investment in terms of what is least likely to lose principal in most retirement plans is typically a money market fund. Most of these funds are currently yielding about 0.01 percent.  The most recent Consumer Price Index had inflation running at an unadjusted annual rate of 3.5 percent. You do the math, but suffice it to say that your purchasing power will be eroded at a pretty steady rate given this relationship.

As I generally say to anyone saving for retirement, your biggest risk is the loss of future purchasing power, as opposed to a loss of principal due to a decline in your investments. Said another way, the biggest risk in retirement is outliving your assets.

I am certainly not advocating that 401(k) investors go out and “swing for the fences”—unless, of course, that fits their situation.

To me, the “safest” thing to do with your 401(k) (and any other investment accounts you have) is to stop listening to the cable news pundits and fear mongers telling you to move your money to cash, dividend-paying stocks, or whatever the latest trendy safe haven might be. Instead, keep investing these dollars in a manner that fits your risk profile and time horizon.

Hopefully this strikes you as boring and similar to suggestions that I have made in many past Smarter Investor posts. This is a timeless approach that I hope you will consider.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner.