Retirement Savings: Your ‘Set It and Forget It’ 401(k) Strategy Is Broken — 5 Investments To Stop Making Right Now
Written by
Dawn Allcot
Edited by
Rikki Elliot
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The power of compound interest helps investments grow. But are investments today growing faster than the rate of inflation? That’s a point that financial analysts are exploring as the U.S. faces inflation rates it hasn’t seen in decades, with no indication of when it might let up.
For four decades, The Wall Street Journal writer Spencer Jakab recently wrote, “Patient savers able to grit their teeth through bubbles, crashes and geopolitical upheaval won the money game.” But, he pointed out, a standard mix of stocks and bonds — in other words, a “set-it-and-forget-it” 401(k) strategy — isn’t likely to work as well now as it has in recent decades.
Instead, investors should turn their attention to the mid-1960s, when inflation began to take off. “A family setting aside $1,000 for their toddler’s education at the end of 1965 in a 60/40 portfolio ended up with $785 in real terms by her senior year of high school in January 1982,” Jakab wrote.
Will it get that bad? Experts don’t seem to know with any certainty. But many sources agree that you may want to avoid the following investments if you want to see your money grow in the long term.
Growth Stocks
In periods of inflation, growth stocks like those that make up the S&P 500 tend not to keep pace, according to WSJ.com. On the other hand, Jakab wrote, “Small-capitalization, emerging-market and value stocks offer the benefit of diversification at what seems like much cheaper prices.”
USBank.com, likewise, recommended value stocks over growth stocks during inflationary times.
Long-term Treasurys
Right now, long-term yields are lower than short-term yields. That means investing in short-term Treasury bills could pay off. However, you could stand to lose with long-term Treasurys, previously viewed as the safer investment.
As Jakab pointed out in his WSJ piece, “Ironically, the traditionally risky part of the 60/40 portfolio could be safer, relatively speaking.”
Certificates of Deposit (CDs)
Unless you can snag a short-term CD with a 5% or greater APY, you could lose money on CD investments due to inflation, while needlessly tying up your money, according to some experts.
Thomas Brock, CFA, CPA, and expert contributor to Annuity.org, recently wrote in a statement to GOBankingRates: “You may be able to get a higher yield with a CD, but the liquidity lock-up does not justify the premium. Moreover, I do not expect short-term interest rates to decline anytime soon. As a result, I am not inclined to purchase a CD to lock in a high rate.”
Long-term Corporate or Municipal Bonds
As with Treasury bills, smart investors want to avoid any long-term investments right now that won’t keep pace with inflation. “Bonds,” Jakab wrote, “… are the real wild card.” Rising rates combined with federal debt could prove to be a dangerous combination for long-term bond investors. USBank.com also advised against long-term corporate or municipal bonds, although these often make up the less risky portion of a balanced portfolio like a 401(k).
401(k) Fixed Investments
Finally, experts advise paying closer attention to any investments you would normally hold for the long term and ignore, such as your 401(k) or IRA. These were designed to be stable, well-balanced, long-term investments to provide financial security in retirement.
But it may take some work to see the kind of returns you’d like in the coming years. “Investors can prepare by lowering their return expectations and playing defense. Regularly rebalancing a mix of safer and riskier assets still trumps market-timing, though perhaps not with the same assets,” Jakab wrote. “The next decade might not be pretty, but with work it can be less ugly.”
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