Retirement savers looking for safe havens in 401(k) plans can rue it

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The data shows some retirement savers are looking for a safe place in their 401(k) plans.

But the move may hobble the opinion of investors in the long term; in fact, it could have been done so just last month.

Investors sold out of target-date funds and large-cap US stock funds in October in favor of more “safe”, such as stable value, money market and bond funds, according to Alight Solutions, which administers the company’s 401 (k) plan.

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

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

Retirement savers seem to have been spooked by wild swings in stocks last month, after having experienced large losses in 2022 Amid worries linked to inflation, interest rates, geopolitical turmoil and other factors.

Target-date funds and large-cap stock funds accounted for 37% and 12% of net investor withdrawals, respectively; The company’s stock fund accounted for 34% of total outflows, according to Alight.

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

Why are Americans finding it harder to retire?

Eighteen of the 21 trading days in October favored the “fixed income” category relative to stock funds, according to Alight. Investors prefer fixed income for 73% of total trading days in 2022.

But the best option for investors — especially those who have years or decades before they tap into their retirement savings — is probably staying put, according to financial advisors.

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

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

“I think most investors are reactionary, instead of acting in a well-intentioned way,” he added. “And because of that, they tend to be all over the place when the market falls.”

Why ‘loss aversion’ hurts investors

This is not to say that there has been a wholesale rush out of stocks for more conservative holdings. The overwhelming majority of 401 (k) investors do not trade at all in October. Those who do so, may regret doing so.

Selling out of stocks while there is a saying blood on the road It’s like timing the market, said Chao. To get out ahead, investors need to time two things perfectly: When to sell out and when to buy back.

And that’s almost impossible to do, even for professional investors.

Making the wrong bet means you will likely buy when stocks are pricey and sell when they are cheap. In other words, the knee-jerk reaction in keeping your money means you can, in many cases, actually do the opposite: Sacrifice your future earnings and ultimately end up with a small nest egg.

I think most investors are reactionary, instead of acting in a well-intentioned way.

Philip Chao

principal and chief investment officer at Experiential Wealth

The S&P 500 Indexa barometer of US stock returns, shed almost 6% in early October, from the market close on October 4 through October 12. However, it rebounded over the course of the month, eventually closing out October with a gain of roughly 8%. .

Investors who sold their shares early will miss out on the rally. If they don’t buy back, they’ll also miss the 5.5% pop on Nov. 10, that is. the biggest rally in over two yearsas the stock market cheered the lighter-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 have greater growth over a long period of time.

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

He cited research showing that in 2018, the year in which there were two major market corrections, the average investor lost twice as much as the S&P 500.

Prioritizing avoiding losses over earning gains “is the main reason why so many investors underperform the market,” said Aguilar.

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