Smart401k Blog

We’ve writen before that best practices in investing - especially retirement investing - run counter to what common sense tells us.  We thought it might be a good time to provide some examples and some suggested rules to help you fight the temptations put forth by your subconsious.  Here are our top five typical investor behaviors that seem like the right thing to do, but run counter to best practices in investing.

1.  Keeping an eye on your account and considering making a change in your investments - every day. (also known as treating your account like you are a day-trader.

2.  Making emotional decisions - stopping losses before they get worse(also known as selling low).

3.  Thinking that what goes up must keep going up(also known as buying high).

4.  Investing only in the funds that returned the most last year.

5.  Picking funds based on the fund family, not the fund.

We’ll address each one of these behaviors in separate blog entries over the next few weeks.

Treating your account like you are a day-trader.

Do you treat your retirement account like you are a professional a day-trader?

Stock market day-traders make their living buying and selling stocks on the same day - sometimes buying and selling the same stock within minutes.  day traders make their money on short-term market movements and aren’t concerned with the long-term outlook of a particular company or the markets as a whole.  They need to sit in front of their computers and watch market movements constantly.  Their goal is to take advantage of short term market ups and downs, and in-turn to not get caught in a short-term market movement they weren’t planning on.  They may bet most of their money on a series of trades in a single day, so they have reason to be worried about the daily fluctuations of the market.

A retirement plan investor is saving for when they are no longer working and need access to money to fund their standard of living when they don’t have a salary to live off of. They are focused on long-term growth of your investments and understand that although the market goes up and down in the short term, historically it has grown significantly over the years.  It doesn’t grow 10-12 % every year, but over the years it has averaged that amount per year.

A retirement plan investor understands that what counts is their account balance they need to withdraw from it, and that their investments will fluctuate up and down along the way.  They don’t like seeing drops in the market, but understand that in the long term, the odds are that they will see growth.  As long as a long-term investor doesn’t pull their investments out of the market, they take advantage of the long-term performance of the market.

As a result, a retirement focused investor doesn’t consider pulling all of their investments out of the markets and into a money market fund when there is a drop in the market.

So which person do you behave like?

Best Practice:  Keep in mind that the market fluctuates over the short-term, but tends to go up over the long-term (remember though - there are no guarantees).  Stick to your investing plan (like your recommendations from us).

Our current assessment of the market is that we are in a market correction (for our reasons why, see our prior posting).  We are close to the low point of a typical market correction, which entails a rapid decline of around 10%, followed by a slower recovery that can take from 2 months to a year (it can often be a fairly rapid recovery).  While we don’t believe we or anyone else can predict the precise beginnings and ends of market corrections on a consistent basis, what is important to a long-term investor is to recognize that it is a correction.  Because all signs point us to believe we are in a market correction, our advice at the current time is to stay the course - we don’t believe a change to the recommendations we provided in July is required at this time.  We recommend that our customers ride this correction out.

That said, we’ve had quite a few of our customers call or email us to ask what to do with their accounts.  While its natural for anyone to be tempted to want to stop the bleeding, if you are losing sleep over fears of losses in your retirement account, or if you have actually pulled out of the funds we recommended for you, there may be an action you should take - adjust your investments to reflect a lower tolerance for risk.  This can be accomplished by retaking your Smart401k questionnaire reflecting your true concerns for market changes, and changing your investments to match the resulting recommendations.

The questionnaire we ask you to take before providing you with our recommendations is designed to assess your tolerance for market risk.  If the current markets have caused you significant nervousness, it can be a sign that your true tolerance for risk is less than what you originally answered in the questionnaire.  By adjusting your answers to reflect even a temporary concern, you will get a more conservative recommendation from us that should have less ups and downs than a more agressive allocation you may have used in the past.

If you feel you need to do something other than stay the course, please give us a call - we’d be happy to talk through your situation with you and help you figure out the best course of action.

At the worst point yesterday, markets were down 10% from this year’s market highs, right in the range of a typical market correction.  Market levels are where they were in mid-April of this year.  While it’s natural for the current market volatility to put fear in all of us, and cause us to want to “stop the bleeding” by getting out of the market, here are a few facts to help you keep things in perspective:

1.       Over the past 75 years, the markets have averaged a market correction of about 10% every year yes, that’s an average of once every year.

2.       Last year, in the early spring, late fall, US Markets experienced a correction about the same magnitude of today’s correction.  By the end of the summer, the market had recovered and we ended the year with very healthy returns.   While we can’t promise that something similar will happen here, we still believe this is a market correction, not the beginning of a bear market.

3.       While things look bad for companies involved in sub-prime loans, and for investments in those companies, the rest of the economy continues to demonstrate strength. Corporate earnings announcements have been strong and are a key factor to watch as we move forward.

In the words of Adam Bold, our Chief Investment Officer, “Underneath it all, the economy is very strong.  This should bode well for stocks throughout the balance of the year.  I think we could still end the year with the markets up 10 to 15%.”

I was asked to comment on what investors should do with their retirement accounts. in light of recent market volatility on CNBC Monday, July 30th, 2007.  Here is a link to their website, along with their intro to the video:

It’s Time to Revisit Your 401(k) Portfolio
The recent market slide has many investors worried about their 401k. Barry Glassman, Senior Vice President of Cassady & Company and Scott Revare, CEO of Smart401k.com, joined Erin Burnett on “Street Signs” with their suggestions on what to do.

http://www.cnbc.com/id/20040713/from/ET/

Current Market Commentary

Adam Bold, Chief Investment Officer, Smart401k.com:

S&P Performance August 1-2006 to July 27, 2007 (Red Line indicates the 1450 line, about the market close for August 1st.  The 1450 line was last crossed in mid-April 2007.

I talked about last week’s five-percent negative move in the markets, saying I was obviously concerned but not overly worried. I’ve tried in my recent commentaries to emotionally prepare our clients for the possibility that we would go through a correction sometime soon.

Market downturns are a part of the normal investment process; markets move up and then they come back a bit. No market moves straight up all the time.

The market made its high at 1,552.50 in the S&P 500 on July 13; it closed Friday July 27th at 1,458.95, almost a 100-point decline over two weeks. On Feb. 20 earlier this year, it made a high at 1,459.70; two weeks later (March 5), it made a low at 1,374.10. We had close to an 85-point decline, a greater percentage decline than what occured last place. It took 42 days to get back to the Feb. 20 high. The resistance at 1,460 has become the support; I believe the majority of any decline in this cycle has taken place barring some natural disaster or terrorist attack we can’t foresee.

The economy remains good. Corporate earnings are good and getting better. Corporations continue to make massive stock repurchases, creating less supply for the same demand which drives prices up. Interest rates remain historically low; I believe we’ll continue in a range between 4.5 and 5.5 percent on the 10-year treasury.