Most people with 401(k) plans are thankful to have a retirement fund at all these days, considering the crazy job market. And for those folks intimidated by Wall Street and uncomfortable managing their retirement solo, the mutual funds offered via your employer might seem like a great way to get some peace of mind.
Not so fast. The problem is that even professional mutual fund managers often screw up, and a mistake in your 401(k) plan can sometimes be as painful as mistakes you would have made actively managing your own money.
And in this crazy market in the wake of the financial crisis, it only takes one bonehead decision to kill your 401(k).
Consider the performance of Bill Gross, widely regarded as the smartest bond investors and on the planet. His PIMCO Total Return Fund (MUTF:PTTRX) boasts almost $250 billion — yes, billion with a “B” — in assets under management. Unfortunately, Mr. Gross made a notoriously bad call at the beginning of 2011 and at his worst had lost investors more than 10% while the broader stock market was basically flat.
That’s not to say this fund is now dead money. It actually has bounced back fairly nicely in recent months. But the lesson should be clear: If it can happen to PIMCO’s Bill Gross, it can happen to any mutual fund manager. That means you can’t just fly blind and trust that your money will be taken care of.
I have identified five funds to watch out for as big risks in 2012. These specific picks could kill your 401(k), but they also tell important stories about different asset classes and fund “flavors.” So don’t think that just because you’re not holding these five particular mutual funds that you’re in the clear.
T. Rowe Long-Term U.S. Treasury
In the past 12 months, the T. Rowe Price U.S. Treasury Long-Term Fund (MUTF:PRULX) has soared more than 20% — so you might think it’s a great bet for 2012 and beyond. But hold your horses. There’s a reason for the Wall Street cliché that “past performance doesn’t guarantee future returns.”
Long-term Treasury bonds are the safe haven for skittish investors, and there were plenty of reasons to scare off traders in 2011. The short list of news prompting a flight to safety included a downgrade of the U.S. credit rating, geopolitical unrest in the Mideast, Japan’s tsunami and the eurozone debt crisis. That’s on top of persistently high unemployment in America.
However, signs of stability are emerging that might draw investors back into riskier investments like stocks in 2012. That could move money out of bonds.
Many investors also fail to realize that it’s possible for a bond to lose value, as evidenced during the 2008 credit freeze. Treasury bonds generally are a good place to park money, but they will do little to help you grow it. Rock-bottom interest on these bonds thanks to Federal Reserve policies to keep rates near zero means it’s not going to take much to prompt investors to start looking somewhere else to make a better return.
In short, long-term Treasuries aren’t ideal investments for anyone looking to retire years down the road because the outperformance of this asset class will soon screech to a halt. T. Rowe’s fund is a bad idea — but, then, so are all long-term U.S. Treasury funds right now.