According to the data, some 401(k) plan participants are seeking safe harbors. Long-term, the move may handicap those investors; in fact, it may have already done so last month.
According to Alight Solutions, investors are moving away from target-date funds and large-cap U.S. stock funds toward “safer” funds like stable value funds, money market funds, and bond funds. Alight statistics show that stable value funds accounted for 81% of net investor funds in October, while money market funds accounted for 16%.
Money market funds are considered “equivalent to cash,” but stable value funds often give a consistent rate of return. Anxious about inflation, interest rates, geopolitical unrest, and other causes, retirement savers appear to have been frightened by huge fluctuations in market prices last month after already suffering large losses in 2022.
The number of net investor withdrawals attributed to target-date and large-cap stock funds, respectively, accounted for net investor withdrawals of 37% and 12%, and company stock funds accounted for 34% of overall outflows.
Popular among 401(k) plan investors, target-date funds offer a combination of equities and bonds corresponding to a person’s predicted retirement year (their target date, so to speak). As retirement nears, the proportions shift toward conservatism.
According to Alight, October 18’s 21 trading days benefited “fixed income” funds relative to stock funds. In 2022, investors chose fixed income on 73% of all trading days. According to financial gurus, however, the wisest option for investors, particularly those who have many years or decades before withdrawing their retirement assets, is likely to stay put.
Experiential Wealth’s Philip Chao compared selling stocks out of fear to making a poor driving decision. You will have an accident if you panic while driving, Chao stated. He believes most investors are reacting, as opposed to acting with purpose and good intentions, and as a result, they tend to be disorganized when markets decline.
Here is why an aversion to loss harms investors.
This does not imply a widespread flight from equities to more conservative investments. In October, most 401(k) investors did not trade. Those who did so, though, may come to regret it.
Chao stated that selling stocks when there is figurative blood on the streets is equivalent to market timing. To succeed, investors must properly time their exit and re-entry into the market. The feat of time a market is virtually impossible to achieve, even for seasoned investors. If you make the wrong wager, you will likely purchase when stocks are expensive and sell when they are inexpensive. In other words, a knee-jerk response to safeguard your money may result in you doing the opposite in many instances. You will sacrifice future profits and wind up with a lesser nest egg.
The S&P 500 Index, a gauge of U.S. stock returns, dropped roughly 6% between the market closes of October 4 and October 12. However, it returned during the month ending October with an approximately 8% increase. Those who sold their investments early would have missed the subsequent surge. If they had not re-entered the market on November 10, they would have missed a 5.5% rise, the largest in over two years, sparked by inflation data that was less than anticipated. The S&P 500 will fall around 17% in 2022.
Chao stated that a risk-free investment does not exist. In general, stocks are riskier than fixed-income investments, but their long-term returns are substantially larger.
Losing money, however, is emotionally painful for investors. According to Omar Aguilar, CEO and chief investment officer at Schwab Asset Management, investors experience the pain of a loss more intensely than the pleasure of a gain. The average investor lost twice as much in 2018 as the S&P 500 did. Aguilar remarked that so many investors underperform in the market is largely attributable to their preference for avoiding loss over generating profit.