Retirement savers looking for the safe haven of 401(k) plans may regret it

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The data shows that some retirement savers are looking for safe havens within their 401(k) plans.

However, this move may worry those investors in the long run; in fact, it may have done so last month.

Investors sold target-date funds and large-cap U.S. stock funds in October in favor of “safer” funds such as stable value, money market and bond funds, according to Alight Solutions, which manages 401(k) plans.

For example, fixed value and money market funds accounted for 81% and 16% of net investor funds in October, respectively, according to Alight data.

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Money market funds are thought of as “cash equivalents,” while fixed-income funds generally offer a fixed rate of return.

Pension savers feared wild swings in stocks last month after already suffering big losses in 2022 amid worries about inflation, interest rates, geopolitical turmoil and other factors.

Target-date funds and large-cap equity funds accounted for 37% and 12% of net investor withdrawals, respectively; According to Alight, the company’s equity funds accounted for 34% of total output.

The most popular funds with 401(k) plan investors, target date funds offer a mix of stocks and bonds that align with someone’s expected retirement year (the target date, so to speak). As retirement approaches, the mix becomes more conservative.

Eighteen out of 21 trading days in October favored the “fixed income” category over equity funds, according to Alight. Investors preferred fixed income on 73% of total trading days in 2022.

According to financial advisers, the best option for investors – especially those who have many years or decades before using their retirement savings – is probably to stay put.

Selling stocks out of fear is like making a bad driving decision, says Philip Chao, principal and chief investment officer at Experiential Wealth in Cabin John, Maryland.

“If you panic while driving, you’re going to crash,” Chao said.

“I think the majority of investors are reactionary instead of being purposeful, with good intentions,” he added. “And that’s why when markets go down, they’re all over the place.”

Why “loss aversion” hurts investors

This is not to say that there has been a wholesale sell-off of stocks for more conservative holdings. The vast majority of 401(k) investors did not trade at all in October. Those who do may regret it.

Chao said that selling stocks when there is proverbial blood in the streets is like timing the market. To get ahead, investors need to time two things perfectly: when to sell and when to buy back.

This is almost impossible to do, even for professional investors.

Misbetting means that you will buy when the stock is high and sell when it is low. In other words, the knee-jerk reaction to protect your money means that in many cases you can do the opposite: Sacrifice your future earnings and end up with a smaller nest egg.

I think most investors are reactionary rather than purposeful, well-intentioned.

Philip Chao

Principal and Chief Investment Officer of Experiential Wealth

The S&P 500 IndexA barometer of U.S. stock returns fell nearly 6% from the market close on Oct. 4 to Oct. 12 in early October. However, it rose again during the month, ultimately closing October up nearly 8%. .

Investors who sold their stocks early missed this rally. Had they not bought back, they too would have missed out on a 5.5% pop on Nov. 10, the biggest rally in two years, as the stock market welcomed softer-than-expected inflation data.

The S&P 500 is down nearly 17% in 2022.

Ultimately, no risk-free investment exists, Chao said. Stocks generally carry more risk than fixed income investments, but have greater upside over the long term.

But investors tend to have an emotional bias against losing money. “Loss aversion,” a tenet of behavioral finance, means that investors feel the pain of a loss more strongly than the pleasure of a gain, writes Omar Aguilar, CEO and chief investment officer of Schwab Asset Management.

He cites research showing that the average investor lost twice as much as the S&P 500 in 2018, when two major market corrections occurred.

Aguilar said that preferring to avoid loss over profit is “the main reason why many investors underperform in the market.”

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