Thursday, July 9, 2009

Seeking Stability

One of the options being bandied about for the Obama IRA that we discussed yesterday is the stable-value fund. Aiming for ultra-safety, stable-value funds invest in bonds, but they go a step further than that. The funds also buy "wrap contracts" issued by insurance companies and banks to protect the underlying value of the bonds they hold. This brings down the funds' return, but it does make them pretty safe.

Not entirely safe, though. Last December, a stable-value fund operated by Invesco became the first-ever such fund to lose some of its value. The value of the bonds had dropped, and the insurance was with the investment bank Lehman Brothers, which had gone bankrupt the previous September. The combination caused this supposedly supersafe vehicle to lost 1.7 percent of its value.

So stable-value funds are still, relatively speaking, very safe investments, and appropriate vehicles for what the Obama IRAs are trying to do. But as we've learned, to our misfortune, over the past couple of years, nothing in the financial world is truly 100 percent safe.

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