At the table in the kitchen, there were three bowls of porridge. Goldilocks was hungry.  She tasted the porridge from the first bowl. "This porridge is too hot!" she exclaimed. So, she tasted the porridge from the second bowl.

"This porridge is too cold," she said. So, she tasted the last bowl of porridge. "Ahhh, this porridge is just right," she said happily and she ate it all up.

Virtually all companies that offer participant-directed retirement plans permit their participants to elect an income-producing, low risk, liquid fund, such as a money market fund or a stable value fund. A stable value fund, as the name suggests, is a conservative investment option designed to provide stability, as opposed to growth. 

Stable value funds have desirable features. By combining bonds and an investment wrap, participants can achieve bond-like returns without the interest-rate volatility present in bond funds. But those features do not eliminate the risk of losses, they just delay them. Indeed, a stable value fund with a longer duration is riskier than a fund with a shorter duration.

The stability-enhancing features of a stable value fund mean that, if a stable value fund invests in a bond that defaults, the value of the fund will not take an immediate tumble, but the loss will be amortized over a period of time. Over the long run, the performance of a stable value fund approaches the performance of the underlying bond portfolio, minus the expenses of maintaining the wrap coverage and administering the fund.

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