Will Bond Funds be the highest value, 401k investment advice discussion for 2012?

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The Financial Industry Regulatory Authority, Inc., FINRA, released the state-by-state online survey of more than 28,000 respondents (released December 2010) as part of the 2009 National Financial Capability Study.

A very impressive team created the survey instrument: the Office of Financial Education of the U.S. Treasury Department; the FINRA Investor Education Foundation; Applied Research & Consulting LLC (ARC); and, Professor Annamaria Lusardi of Dartmouth College.  Further input was provided by the American Institute of Certified Public Accountants (AICPA), Professor Robert Willis of the University of Michigan, and Craig Copeland of the Employee Benefit Research Institute (EBRI) among others.

The most frightening discovery of this study was the finding that 72% of the 28,000 respondents did not know that if interest rates go up, bond values will fall.

A frightening notion when you realize that total U.S. bond market debt was nearly $35 trillion at the end of 2009.

Now let’s dovetail that information with the suggestion by Bill Gross, founder and co-chief investment officer of Pimco, who said the Fed’s announcement of a renewed commitment to quantitative easing will signify the end of a 30-year bull market in bonds.

We may be heading for a 401k plan catastrophe. Particularly if only 28% of the public understands that bond fund values are at risk of falling. Don’t forget that Target Date Funds have bond funds inside and the managers are locked into increasing the bond fund holdings as you get closer to retirement.

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