January 14, 2009

2009 Investment Options for Your 403(b)

We are only two weeks into the new year, but I have already received quite a few e-mails regarding investments for 2009.

I have said before, and I remain, somewhat against putting much of a 403(b) account in fixed income. This is usually because your Georgia TRS account is essentially your fixed income investment, so putting more into fixed income assets is somewhat redundant... but this year could be the exception.

After the credit markets were essentially beaten down in 2008, bonds of very high quality companies (usually called investment grade bonds) were sold down quite heavily and are still selling at a discount. If we are to believe that the U.S. economy will recover, and it will, then these bonds could enjoy some price recovery back to par along with the yield.

And that means??? Essentially, if in your 403(b) options there is an investment grade bond fund (for example - AIG/VALIC has the Vanguard Investment Grade Bond Fund), you should look to allocate some part (probably no more than 10-15%) of your account to this investment.

On the other hand, do not look at last year's return to just make your choices. Last year was a great year for government bonds, but this year could end up being a bad one for government bonds because they already are so highly priced which is only compounded by a very low yield. If you just feel like you have to buy them, do very little or just hold cash instead.

Additionally, while we do not see any inflation right now, all of the money that is being poured into the economy by the government will eventually lead to inflation. It could also be a good time to dabble in inflation protected bonds. I would not go heavy into any allocation here though either (5-10% max). In the world of finance, these types of bonds are usually called "TIPS" (Treasury Inflation Protected Securities).

As for the rest of the account, you really need to continue to research the funds that you have available. A good diversification model that would now include the investment grade and inflation protected bond funds would be excellent. Remember that if you only look at last year, you will be missing the point. Look at good and bad years, look at changes in the managers, etc.

Someone e-mailed me the other day and asked why invest until the market gets better. Simply put, you cannot time the market. The best scenario is to diversify your investments.

In 2002, the the S&P 500 lost 23.37%. At the beginning of 2003, the market continued to trend lower, and a funny thing happened, it turned around. By the end of the year, the S&P 500 had gained 26.39%.

I am not saying that 2009 will be a spectacular year and everything will be rosy, but if do your research and diversify your investments, you will at least be giving yourself a chance to participate.

As always, if you have any questions, feel free to e-mail me.

1 comment:

Anonymous said...

Thanks for the help and explanations. I always look at the previous year to pick the following, and I now understand why I should look at everything instead of just performance from one year to the next.

Thanks again.