You might think that people learned to maintain their retirement accounts when the stock market became volatile.
Unfortunately not.
A new report finds that 401(k) participants continue to sell despite repeated instructions to calm down during market downturns.
For example: According to the Alight Solutions 401(k) Index, the market was in turmoil in early August as investors, including 401(k) participants, became nervous about the economy. On August 2, stock prices began to fall, and 401(k) plan participants began trading their plan holdings, which traded at about 1.7 times their normal trading price. Then, when stocks really fell on Aug. 5, trading activity soared 8.3 times on the average trading day, according to data that tracks inflows and outflows from holdings in 401(k) plans.
Read more: Here’s what to do with your retirement savings when markets are volatile
A hasty act by a 401(k) plan saver led to a flight to safety. People took their 401(k) money out of corporate stocks, large-cap U.S. stock funds, and target-date funds and moved it into stable value funds, bond funds, and money market funds.
Rob Austin, vice president at Alight Solutions, said the last time trading activity was this high was in March 2020, when the market was adjusting to the uncertainty caused by the coronavirus pandemic.
The abnormal situation was not a good thing. The S&P 500 (^GSPC) fell 3% on August 5th, its worst day in nearly two years, then rose 1.04% on August 6th, and fell another 0.77% on August 7th. On August 8th, it rose 2.3%. 8. Anyone who exits a stock on the 5th has missed out on a solid rebound day by two days.
The index, which tracks the trading activity of more than 2 million people and shows monthly volume, asset flows and market details, found that for the entire month of August, people invested new contributions in bond funds 20 out of 22 days. was leaning toward Account activity.
“That’s not unusual,” Austin told me. “We’ve been tracking daily trends since the 1990s and know that when an index like the S&P 500 drops more than 2% in a day, it trades higher than normal.”
“Head for the hills” spirit
Steve Parrish, professor of practice and adjunct fellow at the American College of Financial Services, says there are several factors that cause people to “take their money and head for the mountains when the market fluctuates.” told Finance. “There is recency bias. People tend to prefer recent events over historical events and overemphasize their importance, and when they see a current market decline, they tend to project it into the future. ” he said.
Second, loss aversion is a big driver, Parrish said. “People love market ups, but they hate market downs. They remember what it felt like the last time a drop of water fell, and they don’t want to relive that feeling. and flee for safety.”
The truth is, retirement savers can’t afford to be in such a hurry.
If you save automatically in an employer-sponsored retirement plan, or make automatic contributions to a Roth IRA or traditional IRA, and you have many years until retirement, whether the market is up or not Instead, you’re always investing in a retirement account. Or down. This will ensure smooth returns over time.
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On the other hand, many modern retirement savers are putting money into retirement funds with target dates so that their accounts automatically adjust when the market is turbulent. Generally speaking, Vanguard, for example, states that “If the portfolio’s asset allocation deviates from the target asset allocation by a predetermined tolerance threshold (e.g., a 1% or 2% threshold), the portfolio will be rebalanced. It is said that
Other companies may rebalance monthly or quarterly. At this time, there appears to be no standard methodology for rebalancing when markets are disrupted.
With a target-date retirement fund, you choose the year you want to retire and buy a mutual fund with that year in its name (such as Target 2044). The fund manager then splits the investment between stocks and bonds and tweaks it to a more conservative mix as the target date approaches or shortly after.
Reality: Finding the best time to sell and buy stocks is very difficult. If you exit when the market is down, you may not be able to capture the upside when the market starts to rise again.
If you prefer to do it yourself, follow these steps:
Let’s review your asset allocation. “Investors who don’t think carefully about their risk tolerance based on their age and retirement goals are more likely to panic sell,” said Mark Johnson, investment and portfolio management fellow and professor at Wake Forest University. Ta.
Financial advisors typically recommend rebalancing (adjusting the mix of stocks and bonds) if your portfolio deviates more than 7% to 10% from its original asset allocation.
“With the help of diversification, long-term investment strategies, regular portfolio rebalancing, dollar-cost averaging, and avoiding market timing, investors have little to worry about,” Johnson added.
Annual health checkups are effective. For example, if you invest too much of your savings in stocks and find it difficult to maintain them when the market fluctuates, you might consider reducing your holdings.
The key is to stay calm through the chaos and take action when things calm down. “Recall the video where an adult places a piece of candy in front of a child and asks the child to wait until they eat it,” Parrish says. “Then you’ll get more candy. Some people will wait, but the majority want immediate results.”
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Kelly Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and author of 14 books, including In Control at 50+: How to Succeed in The New World of Work and Never Too Old To Get Rich. Follow her on X @Kellyhannon.
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