Blackstocks.com: In the Know

How Stable Are Stable Value Funds?

Does your 401(k) plan offer a fund with "Stable Value," "Income Fund" or "Stable Return" in the title? If so, you've probably got access to a stable value fund. This type of fund, available in two-thirds of all employee-directed 401(k) plans, can be an attractive alternative to money market funds and bond funds.

Stable value funds are not necessarily the conservative investor's road to Shangri-La, however. There is a slim chance of losing money with a stable value fund investment, although the market risk is generally less than with a stock or bond fund. What's more, in a period of rising interest rates and increasing inflation, your return may decline, possibly becoming lower than the inflation rate.

Stable value funds are available to participants in defined contribution savings and profit-sharing plans, and Individual Retirement Accounts (IRAs), and they are beginning to show up as mutual funds available to individual investors. They are included in two-thirds of employee-directed 401(k) plans, and represent approximately 15% of assets in those plans, according to the Employee Benefit Research Institute.

Here's a look at stable value funds and how they work:

About Standard & Poor's 500

The Standard & Poor's 500 Composite Stock Price Index (S&P 500) is a benchmark, or measuring stick, for U.S. stock market performance. It is made up of a mix of 500 U.S. companies that are leaders within their sectors, but are not necessarily the largest companies in the United States.

The index's value is calculated by adding the market values of the 500 stocks and dividing the total by a number called the "index divisor," which makes it possible to compare index values over time.

The S&P 500 is managed by an objective Index Committee at Standard & Poor's. The committee's analysts are responsible for making sure the companies in the S&P 500 meet specific, detailed criteria relating to market capitalization, market sector, and other factors. They keep a list of qualifying companies in an Index Replacement Pool. If a company is removed from the S&P 500 because of a change in its status (merger, acquisition or bankruptcy, for example) the committee chooses a company from the pool to replace it. The chosen company hears about its new status at the same time as the general public does.

Generally, the index sees only a few changes each year. Being added to the index can cause a company's stock price to rise, and being removed can provoke a fall, since many index funds tend to buy what is in the S&P 500 and sell what is out.

Technorati tags: personal, life, money, love, inspirational, Alton Perkins, wealth, investing, African American, Mutual Funds, Books, Nasdaq Stock Market, Blackstocks.com, Growth Fund, Video, Stocks, www.blogblackstocks.com

So what's all this fuss about index funds?

After all, the best they can hope to do is return the market average. Right? Come to think of it, that's the worst they can expect to do, too.

And that's precisely what the fuss is about: index funds are attracting increasing numbers of investors who feel that the relative certainty these funds provide is worth more than the chance to beat a benchmark now and then with a managed fund.

In fact, of all the mutual funds out there, index funds provide the highest probability that investors will meet the retirement goals they set using asset allocation tools.

Index funds buy and hold shares in the indexes we hear so much about ­ the S&P 500 (large-cap), Russell 2000 (small-cap) and Lehman Brothers Aggregate (bonds), for example. The performance of each index fund is basically identical to the performance of the index it represents, because it holds shares that mirror or reproduce that index.