The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Chapter 6. Stable-Value Funds

At the end of the first quarter of 2004, money market accounts (a traditional safe harbor for investors) were yielding less than 1 percent, the lowest level in decades. Ten-year Treasury bonds were yielding less than 4 percent. If interest rates rose, longer-term bond prices could fall dramatically. Investors who were unwilling to, unable to, or had no need to take the risks of equity ownership were searching for safe investments that could provide higher-than-money-market yields without significant credit, price, or inflation risk.

Investors' search for incremental yield intensifies whenever interest rates fall to low levels. Fortunately, there is an investment vehicle that fits the bill, delivering somewhat higher returns without forcing the investor to take significant credit or inflation (price) risk. The product is called a stable-value fund. Stable-value funds are also called interest-income, principal-preservation, or guaranteed-interest funds.

Stable-value investments are fixed-income investment vehicles offered through defined-contribution savings and profit-sharing plans, 529 college savings plans, and individual retirement accounts (IRAs). The assets in stable-value funds are generally very high-quality bonds and insurance contracts that are purchased directly from banks and insurance companies that guarantee to maintain the value of the principal and all accumulated interest. They deliver the desired safety and stability by preserving principal ...