Data shows that some retirement savers are looking for a safe haven within their 401(k) plans.
But the move could irk those investors in the long run; In fact, he may have done just that last month.
Investors dumped target-date funds and large-cap U.S. stock funds in October in favor of “safer” ones, such as stable coins, money markets and bonds, according to Alite Solutions, which administers company 401(k) plans. Fund.
For example, stable value and money market funds captured 81% and 16%, respectively, of net investor funds in October, according to Alight data.
Money market funds are considered “cash equivalents,” while stable value funds typically provide a steady rate of return.
Wild swings in stocks last month spooked retirement savers after they already suffered big losses in 2022 amid concerns over inflation, interest rates, geopolitical turmoil and other factors.
Target-debt funds and large-cap stock funds accounted for 37% and 12% of net investor withdrawals, respectively; According to Alight, the company’s stock funds account for 34% of total outflows.
Target-date funds, the funds most popular with 401(k) plan investors, offer a mix of stocks and bonds that align with one’s expected retirement year (their target date, so to speak). The mix becomes more conservative as retirement approaches.
Eighteen of the 21 trading days in October favored the “fixed income” category relative to stock funds, according to Allitee. Investors favored fixed income during 73% of the total trading days in 2022.
Yet the best option for investors — especially those who will be around for years or decades before tapping their retirement savings — is probably to stay put, according to financial advisors.
Selling stocks out of fear is like making a bad driving decision, said Philip Chao, principal and chief investment officer at Experiential Wealth in Cabin John, Maryland.
Chao said, “If you panic while driving, you will crash.”
“I think most investors are reactionary rather than purposeful, with good intentions,” he said. “And because of that, when markets fall they are everywhere.”
Why ‘loss aversion’ hurts investors
That’s not to say there was a wholesale rush of stocks to more conservative holdings. The overwhelming majority of 401(k) investors didn’t trade at all in October. However, those who did may come to regret doing so.
Chao said selling stocks despite the bloodshed in the streets was tantamount to timing the market. To come out ahead, investors must time two things perfectly: when to sell and when to buy back.
And doing so is nearly impossible, even for professional investors.
Wrong betting means that you buy when the stock is expensive and sell when it is cheap. In other words, a sudden reaction to protect your money means that in many cases you may actually do the opposite: sacrifice your future earnings and end up with a smaller nest egg.
He cited research showing that in 2018, a year that saw two major market corrections, the average investor lost twice as much as the S&P 500.
Aguilar said “prioritizing avoiding losses over making gains” is a major reason why so many investors underperform the market.
I think most investors are reactionary, instead of acting in a purposeful, well-intentioned way.
Philip Chao
principal and chief investment officer at Experiential Wealth
The S&P 500 index, a barometer of US stock returns, shed nearly 6% in early October, from the market close on October 4 to October 12. About 8% profit.
Investors who sold their shares early may have missed out on that rally. If they don’t buy back, they would have also missed out on the 5.5% pop on November 10, the biggest rally in two years, as the stock market appreciated lower-than-expected inflation data.
The S&P 500 is down about 17% in 2022.
Ultimately, risk-free investing doesn’t exist, Chao said. Stocks generally carry more risk than fixed income investments, but also offer great growth over the long term.
But investors have an emotional bias towards losing money. “Loss aversion,” wrote Omar Aguilar, chief executive officer and chief investment officer of Schwab Asset Management, is a principle of behavioral finance that holds that investors feel the pain of loss more strongly than the joy of gain.
He cites research demonstrating that in 2018, a year in which there were two big market corrections, the average investor lost twice as much as the S&P 500.
Prioritizing the avoidance of loss over earning a gain “is a major reason why so many investors underperform the market,” Aguilar said.
