Thursday, March 12, 2009

Your retirement account owns stocks.

I think there are many people who don't understand this basic fact:

If you own a retirement account, and if you haven't specifically contacted the administrator to move your savings out of the stock market, then you are at least partly invested in the stock market.

"Funds," "mutual funds," "equity funds," "index funds," and "growth and income funds" are all fancy names for a group of stocks. If you own one or more funds, then you probably own stocks, and that portion of your savings will move more or less in lock-step with the S&P 500, plus or minus any theme variations like company size or foreign/domestic breakdown. Fund managers and retirement account sponsors (Fidelity, TIAA-CREF, etc.) are not allowed to time the stock market, and will never pull your money out of stocks in anticipation of a crash. If they did, they themselves would be instigating a selloff and a crash.

It's up to the individual investor to allocate his savings between various stock funds and debt market funds (bonds, money market), either by calling his investment company or by going online and using their website. It's unfortunate that most retirement accounts are limited to these two types of funds, beacause we may be in the middle of both a stock and bond bubble, but at the moment we have to make do with what we have. My "Limited" portfolio is in a U.S. Treasury money market fund, which is as close to simple cash as any fund can be.

1 comment:

Jody Wilson said...

Yes, snippy anonymous commenters, I know that some mutual funds own bonds. The point of this post is to get the attention of people who don't understand the basic operating principles of 401ks and mutual funds. If you have a better idea for getting people to pay attention, then start your own blog.