Perspectives

Low-risk investments can be risky

Many investors think “low‑risk” or money market/stable value investments are best because they have the least chance of losing money. But depending on your age, long‑term goals, and financial health, playing it “safe” may not be the best retirement strategy.

To see if money market/stable value investments are right for you, let’s first look at how they invest your money. Both money market and stable value funds are investments that are profes-sionally managed with the goal of maintaining a steady value.

Money market mutual funds

The term “money market” typically includes short-term investments in U.S. Treasury bills, bank certificates of deposit (CDs), and short-term IOUs issued by corporations.

Like a bond, a money market investment is always issued for a set period of time—called a maturity. However, a money market investment’s maturity is usually one year or less. Because of their very short maturities, money market investments generally pay less interest than bonds.

Unlike bond funds, money market mutual funds seek to manage their investments so that each fund’s share price stays constant, usually at $1.00 per share.

An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although these funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market funds.

Stable value funds

Stable value funds invest in investment contracts, such as guaranteed investment contracts (GICs), with the objective of paying competitive current income while maintaining stability of principal. With these types of contracts, the value of the “guarantee” to repay the original investment depends on the issuer’s financial strength.

Contracts are issued primarily by high-quality insurance companies but may also be issued by banks and other institutions. Maturities of investment contracts usually range from three to seven years.

A stable value fund diversifies by investing in a variety of contracts—a mixture of maturities and issuers. Stable value funds are managed with the goal of maintaining a stable unit price of $1.00.1

How money market/stable value investments can fit into your retirement strategy

Historically, money market/stable value investments have delivered a lower rate of return than bonds or stocks over the long term. Therefore, the return of money market/stable value investments may not outpace the rate of inflation.

That’s why it’s important to stay diversified and invest in a variety of funds with different objectives and levels of risk and return potential. Money market/stable value investments may give you fewer surprises, but stock investments may offer greater return potential in exchange for higher risk.

As you decide how to invest for retirement, when you plan to retire should be a major consideration. If you are planning to retire in the next five years, you may want to consider putting part of your money in money market/stable value investments. Even when you’re retired, however, you may still want to keep a portion of your savings in stocks. Most retirements last 30 years or more, and you want to make sure your savings have the opportunity to keep up with you.

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A stable value fund typically is not a mutual fund and instead is a common trust fund established by a bank. Investments in a stable value fund are not deposits or obligations of the U.S. government or its agencies. Although these funds seek to preserve the value of your investment at $1.00 per unit, it is possible to lose money by investing in the funds.