Retirement savers looking for safe havens within 401(k) plans might regret it

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

But the move could weaken those investors in the long run; In fact, it may have done so as recently as the last month.

According to Alight Solutions, which manages companies’ 401(k) plans, investors sold target date funds and large-cap US stock funds in October in favor of “safer” funds such as stable value, cash and bond funds.

For example, according to Alight data, stable value and money market funds captured 81% and 16% of net invested funds, respectively, in October.

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Money market funds are considered “cash equivalent”, while stable value funds generally offer a consistent rate of return.

Retirees appear to have been spooked by wild stock swings over the past month, after suffering big losses in 2022 on worries surrounding inflation, interest rates, geopolitical turmoil and other factors.

As-of-date funds and large-cap stock funds accounted for 37% and 12% of net investor withdrawals, respectively; Corporate equity mutual funds accounted for 34% of total outflows, according to Alight.

Target date funds, which are most popular with 401(k) plan investors, offer a mix of stocks and bonds that are timed to a person’s expected retirement year (their target date, so to speak). As retirement nears, the mix becomes more conservative.

Why Americans are having a harder time retiring

According to Alight, 18 out of 21 trading days in October favored the fixed income category versus equity funds. Investors favored fixed income for 73% of all trading days in 2022.

But the best bet for investors — particularly those with many 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.

“If you panic while driving, you will get into an accident,” Chao said.

“I think most investors are reactionary rather than acting with purpose and well-intentioned,” he added. “And that’s why they tend to be everywhere when markets are falling.”

Why “Loss Aversion” Hurts Investors

That’s not to say there has been a massive rush into equities in favor of more conservative holdings. The overwhelming majority of 401(k) investors did not trade at all in October. However, those who did may regret it.

Selling out stock while it’s proverbial blood in the streets is comparable to the timing of the market, Chao said. To stay ahead, investors need to time two things perfectly: when to sell and when to buy back.

And that is almost impossible even for professional investors.

If you make the wrong bet, you’ll likely buy when stocks are expensive and sell when they’re cheap. In other words, a knee-jerk reaction to protecting your money means that in many cases you can actually do the opposite: sacrifice your future earnings and end up with a smaller nest egg.

I think most investors are reactionary instead of acting purposefully and well intentioned.

Philip Chao

Principal and Chief Investment Officer at Experiential Wealth

That S&P 500 Indexa barometer of US stock returns, lost almost 6% in early October from the market close on Oct. 4 through Oct. 12. However , it rallied over the month and ended October up around 8 % .

Investors who sold their shares early would have missed out on this rally. If they hadn’t bought back, they would have missed a 5.5% bang on November 10th as well biggest rally in over two yearsas the stock market cheered brighter than expected inflation data.

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

Ultimately, there is no risk-free investment, Chao said. Stocks generally carry more risk than fixed income, but they also show much greater growth over long periods of time.

But investors tend to be emotionally biased about losing money. “Loss aversion”, a principle of behavioral finance, states that investors feel the pain of a loss more than the joy of a gain, wrote 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, a year that saw two major market corrections.

Putting avoiding losses ahead of making profits “is a key reason why so many investors lag behind the market,” Aguilar said.

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