We all worry. You might be surprised to learn that the worry we devote to our 401(k) plan investments has been studied. Worry is never constructive. It is even less helpful when it alters the way we manage our 401(k) plan investments. Recent behavioral finance studies have shown that
We run from stocks due to worry
Recent studies have shown that the more frequently investors review their portfolios, the more conservatively they invest. This is not a positive outcome. Investing too conservatively keeps 401(k) plan investors from building an account balance large enough to retire without making significant changes to their standard of living. Investors who reviewed their portfolios on a monthly basis had allocations of roughly 60% bonds and 40% stocks. Conversely, those that reviewed their portfolios annually had allocations of 70% stocks 30% bonds a huge difference.
Volatility causes loss aversion
Researchers found that the more frequently investors reviewed their portfolios, the more they became aware of short-term volatility and the impact it had on their balances. More frequent exposure to volatility resulted in feelings of
Overcoming participant worry in 401(k) plans
Unfortunately participants are most likely to review their portfolios when the market falls. Fear of additional loss causes many to realize losses by selling equities and electing a more conservative allocation. Plan sponsors should make sure, in times of market volatility, to encourage participants not to deviate from their savings and investment plans. They should also strongly encourage participants to call the plans investment adviser before making any changes.
Many participants make bad decisions based upon fear during periods of time when the stock market falls. Try and help them avoid these mistakes by encouraging them to reach out to your investment adviser.
Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC (