Recently, there was a very interesting article written by planadviser Magazine (http://www.planadviser.com/investing/ article.php/3353) discussing how 401(k) assets in stable value reached an all-time high in November. The article cites data from the Hewitt 401(k) Index. Here's a few of the details:
-“The Index for November shows stable value funds gained $342 million from participant transfers, and by the end of the month, the allocation to stable value was 33.4%, up from 20.5% just one year ago. Balanced and money market funds also received $61 million and $12 million in inflows, respectively, Hewitt said."
-“Outflows mainly came from large U.S. equity, lifestyle, company stock, and international funds.”
-“On average, 401(k) participants transferred 0.06% of balances on a net daily basis in November (slightly above the trailing average of the past 12 months).”
-“The direction of transfers was fixed income-oriented on 58% of the days in the month.”
-“The level of transfers was above normal four days of the month, with money moving toward fixed-income investments on all four days, each of which was immediately following large declines in the stock martket.”
This is just more supporting evidence that the vast majority of participants do the wrong thing at the wrong time (usually because of emotion). It's also a large contributing factor to why most participants earn sub-par returns. DALBAR releases a study each year showing the 20-year return of the S&P 500 as compared to the average equity investor. Every year it seems the average investor trails the index by roughly 7-8%!
There is no question that the past three months have been incredibly trying for every investor, whether novice or professional. The velocity with which information flows in a globally connected world hasn't helped, especially when just about every newspaper, magazine, website or news station has contributed to doomsday scenarios. Couple that with our Nation’s leadership questioning the validity of the Retirement System and specifically the 401(k) and you can hardly blame the average person for running for the hills.
November 20th represented the low point so far for the S&P 500 when it reached 752, having fallen 100 points in two days. Presumably, one of the four days during the month where the level of transfers was above normal was on or around November 20th and those investors who transferred their money into stable value/fixed income locked in huge (and permanent) capital losses. Many are likely to be nowhere near retirement and therefore had no immediate need to sell other than the emotional distress they were experiencing (pointing, in part, to a risk tolerance/time horizon problem). Assuming the market reverts to the mean and returns its historical average of approximately 10%, it would take those investors roughly 4 years to make their money back. Interestingly, since November 20th the S&P has gained approximately 20%.
How many of those people who went to cash do you think are still sitting there? Probably most of them. If these investors remain in “safe” investments until the market has recovered, they will have missed the gains (yet again) and thus continued the poor cycle of buying HIGH and selling LOW.
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