What to invest in my 401K if interest were to go up

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Submitted by jimmyle on May 4, 2010 - 7:43am

I sold all my 401K stocks mutual funds and moved into bonds index last week. However, I read that bonds tend to go down if interest were to go up. What can I invest in to take advantage if interest rate goes up?

Thanks,

Submitted by meadandale on May 4, 2010 - 7:52am.

Yeah, IMO now is a terrible time to be in bonds since rates are only going to go up. Equities are also dicey since I have a feeling that we are in an exuberant bubble--there are still problems with our economy that are being ignored by the market.

I've been keeping most of my new retirement contributions in cash..MM rates are low but so is inflation so at least I'm not at risk of massive principal losses. Until some more things shake out in this market I'm not comfortable piling back into the market.

Submitted by DataAgent on May 4, 2010 - 9:46am.

If interest rates go up because of an overheating economy, stocks are your best bet.

If interest rates go up because of inflationary pressures, hard assets (ie. real estate, gold, oil etc) are a good place to be.

Submitted by Coronita on May 4, 2010 - 11:12am.

BP :)

Submitted by livinincali on May 4, 2010 - 3:55pm.

TBT - ETF that is short US treasuries. For the past 30 years bonds have been in a bull market. From 1982 to about 2000 both stocks and bonds were both in bull markets. I think there will be a time where both stocks and bonds are in bear markets and it might be rather difficult to get a good return. Neither stocks or bonds performed well from 1976 to 1982. A lot of people think high inflation makes stocks a good investment but that was only true if you got in the 1975 bottom from 1976 to 1982 stocks had a negative real return. Commodities might be your best bet if you truly believe in high interest rates/high inflation.

Submitted by Effective Demand on May 4, 2010 - 5:53pm.

jimmyle wrote:
However, I read that bonds tend to go down if interest were to go up.

Well, due to the time value of money the present value goes down when interest rates rise but unless the bond defaults you will make back what you put in plus the interest rate at the time you purchased. What you will have "lost" when the bond matures would be the difference of the money invested at the higher interest rate.

A good protection against interest rate fluctuations is a solid bond fund like the Vanguard Total Bond Fund. It has a very diversified base of bonds and a medium term duration that gets you a good mix of yield and safety. It reinvests at maturity so old low yield bonds get replaced by new higher yield bonds.

I'd also never recommend being out of stocks entirely, Come up with a stock / bond allocation you think matches your risk tolerance and then invest based on that.

I'd recommend Jack Bogles "The Little Book of Common Sense Investing" as a rudimentary starting point for you. Betting all your chips on one thing (stocks, bonds, commodities) is extremely risky. Its best to invest in the whole market (total stock market, total international, total bond) and get the averaged gains that will get you that beats 99% of the long term returns of most mutual funds and requires very little work. Moving your money around based on your whims or "read" of the market is a losing proposition. Some may win over the short term due to variance/luck but over the long term it's a losers game.

Submitted by CA renter on May 4, 2010 - 6:19pm.

meadandale wrote:
Yeah, IMO now is a terrible time to be in bonds since rates are only going to go up. Equities are also dicey since I have a feeling that we are in an exuberant bubble--there are still problems with our economy that are being ignored by the market.

I've been keeping most of my new retirement contributions in cash..MM rates are low but so is inflation so at least I'm not at risk of massive principal losses. Until some more things shake out in this market I'm not comfortable piling back into the market.

We're doing the same (and yes, it hurts). :(

Submitted by no_such_reality on May 4, 2010 - 6:24pm.

Tobacco, Alcohol, Firearms and maybe a Casino.

Submitted by moneymaker on May 4, 2010 - 9:15pm.

It sure looks like we are going down the same road Japan went down in the 90's. One thing that concerns me is I've seen lots of hundred dollar bills used at cash registers lately and also heard there are counterfeiters overseeas that have it down so well that the experts can't tell the difference. I'm wondering if these high tech counterfeit bills are being spread around here in San Diego. That could certainly cause inflation, but I fear it would be caught too late.

Submitted by afx114 on May 4, 2010 - 9:43pm.

Interesting, threadkiller. I ate brunch at a cafe last weekend and saw the lady behind the counter inspecting three $100's. I asked her if she gets a lot of counterfeits and she told me that she's been in business 15 years and had never received one until last year. Since then she's gotten three. She wasn't even sure if they were real. She had the pen out, marked them up, looked at them in the light, then asked me if I thought they were real or not. I told her I'm no expert but they looked real to me. Seems to me a retail business should be educated on these things. A new $100 was recently released: http://www.newmoney.gov/newmoney/Splashpage.aspx

Maybe you're on to something.

Submitted by Coronita on May 5, 2010 - 8:53am.

deleted

Submitted by jimmyle on May 6, 2010 - 12:37pm.

Wow, what happened to the Dow and Nasdaq earlier? I am so glad that I sold all my stocks mutual fund last week. I wanted to buy treasuries like many here susggested but my Fidelity 401K doesn't give that option. Basically I have 50% in bonds and 50% interest income fund right now.

Submitted by EmilyHicks on May 20, 2010 - 8:56pm.

Lucky you. I lost more than 10% since April. Is it too late to move to bonds now?

jimmyle wrote:
Wow, what happened to the Dow and Nasdaq earlier? I am so glad that I sold all my stocks mutual fund last week. I wanted to buy treasuries like many here susggested but my Fidelity 401K doesn't give that option. Basically I have 50% in bonds and 50% interest income fund right now.

Submitted by jimmyle on May 21, 2010 - 6:30am.

More pain coming today, Nasdaq is down another 4 to 5%. I see the Dow at 9000 and Nasdaq at 1000.

EmilyHicks wrote:
Lucky you. I lost more than 10% since April. Is it too late to move to bonds now?

jimmyle wrote:
Wow, what happened to the Dow and Nasdaq earlier? I am so glad that I sold all my stocks mutual fund last week. I wanted to buy treasuries like many here susggested but my Fidelity 401K doesn't give that option. Basically I have 50% in bonds and 50% interest income fund right now.

Submitted by clearfund on May 21, 2010 - 12:16pm.

I'm partial to real estate so I've put cash into single tenant, nnn, bldgs with 15+ year terms remaining leased only to Fortune 100 companies. I like direct ownership, not non-traded REITS for many obvious reasons. Clearing 9% cash plus depreciation.

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