Buying High and Selling Low

This Week's Quote:

“Virtually nothing is impossible in this world if you just put your mind to it and maintain a positive attitude.”
                                  -Lou Holtz, Former Football Player
 
We all know the adage “buy low, sell high”, yet in practice it can be easy to freak out and make rash decisions in the stock market. Diving into behavioral economics and psychology, this article presents a pretty convincing case that the best thing you can do for 401(k)’s is to spend less time checking the market. It provides actionable steps you can take to accomplish that and stave off the often counterproductive urges to jump ship.

-Jordan Bradstreet

How to Peek at Your 401(k) Without Freaking Out
 
Checking balances too frequently when markets decline can lead to some bad decisions—and more losses over time
 
With the S&P 500 down 21% in the first half of 2022, 401(k) balances are taking a hit. Just because you can check those numbers online to assess the damage doesn’t mean you should.

Taking a quick glance when stocks are down can cause investors to take steps that undermine their long-term financial security, increasing the temptation to sell stocks at fire-sale prices.

“When markets are down people get concerned and want to check their balances,” said Julie Virta, senior financial adviser at Vanguard Group. “But that can be counterproductive.”

The more people look at their 401(k)s, the lower their long-term returns are likely to be, according to two landmark studies from behavioral economists Shlomo Benartzi and Richard Thaler. They found that investors with distant goals who resisted the temptation to monitor the market earned significantly higher profits over time than those who checked annually. Why? They were likely to invest more in stocks.

For the average person, the pain of losing is more powerful than the pleasure of gaining, behavioral economists say. This phenomenon is made even worse when people constantly check day to day movements of the market and lose sight of their long-term goals. Mr. Thaler and Mr. Benartzi call this “myopic loss aversion.”

The volatility of stocks also helps explain why peeking can be painful. Since 1929, the S&P 500 index has posted declines on 46% of days in which the markets are open, subjecting those who check their balances daily to lots of bad news. In contrast, those who looked at where they stood once a year saw losses only 25% of the time. Over 10-year periods, the odds of a loss were just 6%, according to BofA Global Research.

“If you check often you will see losses more often, and you will be scared to invest in stocks,” said Prof. Benartzi.

Avoiding this behavior is easier said than done in the digital age, which makes it harder for investors to suppress the urge to check their balances on computers and smartphones. Decades ago, before the internet was widespread, workers seeking to know their balances had to call their 401(k) plan’s call center or wait for quarterly or annual account statements to arrive in the mail. To execute trades, they typically had to submit paperwork, said Prof. Benartzi.

“People who would normally check their balances every quarter or year can now check every day,” he said. “The internet has made the checking habit much worse.”

Among the nearly five million participants in 401(k) plans Vanguard administers, 68% checked their accounts in 2021, up from 57% in 2012. On average, those using mobile devices looked 20 times in 2021, versus 10 times for those using computers.

That doesn’t mean all who check their balances end up trading.

When the market fell during chaotic periods in 2008 and the first month of the Covid-19 pandemic, fewer than 20% of workers made trades in their portfolios or changed their savings rate, according to an analysis of client trading data by investment consulting firm Callan LLC. In one plan Callan studied, workers who did sell during the first quarter of 2020 sold more than 40% of their stocks, on average.

Many eventually moved some money back into stocks but typically only after prices rebounded and shares were more expensive, said Ben Taylor, a consultant at Callan.

Here are some ways to instill good habits:

Have a plan

How often should you check your balance? There are varying opinions.

Prof. Benartzi recommends checking as infrequently as possible until you get close to retirement and need to start planning how to turn your savings into a retirement income. Vanguard suggests looking at least once a year but no more than once a quarter, to see if you’re on track toward meeting your retirement goals.

Such an approach allows you to take corrective steps, such as raising your saving rate, but exposes you to greater temptations to trade. To resist impulsivity, put those dates on your calendar, said Ms. Virta of Vanguard.

And gauge your mood before checking. “If you’re worried or anxious, it’s not a great time to check your balance,” said Rob Austin, director of research at 401(k) record-keeper Alight Solutions LLC. That is true even if the worry is created by something other than the markets.

Set it and forget it

Take advantage of features many 401(k) plans offer to put saving and investing on autopilot.

These can alleviate “some of the worry about how to manage your portfolio through market turbulence,” said Amy Arnott, a portfolio strategist at Morningstar, Inc. By encouraging a hands-off approach, they may also reduce the temptation to check the account balance and trade, she said.

Most 401(k) plans offer target-date funds, a one-size-fits-all investment product that shifts from stocks to bonds over time, as an investor ages.

For those with more complicated financial lives who want greater personalization, managed accounts pair human advisers and computer algorithms to manage an individual’s investments for an additional fee.

Create speed bumps

To reduce the temptation to check your balance and trade, Prof. Benartzi suggests deleting apps that provide access to your 401(k) account.

If you have the urge to trade, ask yourself whether you’re taking action because your personal situation has changed, or simply in reaction to the market, Ms. Virta said.

For those with an effective long-term financial plan, the only reason to make a change is because your personal situation has changed, she said.

Those who aren’t sleeping at night may discover their tolerance for stock market risk is lower than they had previously assumed. But before selling stocks, they should revise their financial plan and be prepared to save more since they are likely to earn lower long-term returns with a more conservative approach, Ms. Virta said.

Before trading, Mr. Taylor recommends speaking with your financial adviser or a representative in your 401(k) plan’s call center. When Callan analyzed client trading data from the first quarter of 2020, it discovered that workers who spoke with a 401(k) representative and still elected to trade sold far less stock than those who had no such conversation.

The goal is to “give you time to reflect and consider why I am making this change,” said Ms. Virta.

Credit Given to: Anne Tergesen. Published July 2, 2022 in the Wall Street Journal.
 
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This Week’s Author, Jordan Bradstreet

-until next week.