One of the biggest mysteries to emerge from the recession is why investors have stuck with their 401(k) in the face of a 55% market decline between October 2007 and March 2009.
The simple reason, The Wall Street Journal reports, is the payroll deductions every two weeks continuously pump up participants’ balances, and unwitting, disengaged investors see their balances holding steady. Instead, they actually should be looking at performance. And if they did, more of them would bail out of the market.
Certainly, figures from the nation’s biggest fund administrators bear out this inertia. Among the three million 401(k) participants that
What’s more, Vanguard figures show that only 16% of 401(k) investors made one or more trade in 2008, barely changed from 15% in 2007, and oddly down from 20% in 2004.
“It is kind of striking,” said Stephen Utkus of the
Utkus calls the automatic contributions that pump up 401(k) balances the “contribution effect,” which he also credits with the general inertia among 401(k) investors. He also notes that investors have been told time and again to believe in long-term investing.
While it is a good idea to be patient with the market, advisers say, investors should not be catatonic. As The Journal recommends, “Investors should rebalance annually to sell some of what has gone up and buy some of what has done down.”