Smart401k Blog

Last week, we conducted some focus group sessions to see how people who didn’t know anything about Smart401k reacted when presented with our website and our service.  What was unique about this group from our perspective was that they didn’t ask to find out about our service - we were coming to them to gauge their reactions and understand their needs and values regarding retirement savings and investing. 

We learned a lot, and not only about the strengths and weaknesses of our website and how we describe our service.  We also learned that people have different perspectives about what the most important things are you can do when saving and investing for retirement. 

Instead of just telling you what our focus group thought, or what we at Smart401k believe the best practices are, we’d like to ask you what you think - In your words.   Just tell us what you think are the three most important actions you can take to positively impact your retirement savings investments and why.   At the conclusion of the survey we’ll send a  $50 Starbucks Gift Card to the person who gives us the best response (in our opinion).

In addition, we’ll put a selection of the responses as comments to this blog entry.  Let us know if you don’t want us to publish your name and we’ll be sure to exclude it before posting your response.  If you are more comfortable just emailing us your response rather than commenting on this blog entry, please send it to info@smart401k.com. 

We’ll close this contest/survey on Monday, September 22nd and send out the Gift Card shortly afterwards.  Thanks, and good luck! 

Well, its finally here - a Bear Market.

As many of you know, two popular measures of U.S. stock market performance are the Dow Jones Industrial Average, and the NASDAQ Composite Index.  Wednesday, the Dow Jones Industrial Average closed at 11215.51, down 20.8% from its record close hit last October. A fall of 20% from the last market high is traditionally considered the definition of a Bear Market. The technology-focused Nasdaq Composite Index skidded 2.3% to end at 2251.46, also entering Bear territory.

From a historical perspective, no two Bear Markets have been alike.  But we can get some ideas of what to expect in the coming months by looking at the averages and extremes of market performance in the more recent Bear Markets.

First, a definition:  A Bear Market starts when stocks begin what turns out to be a 20% decline from its previous high point. It’s end is the bottom — seen only in retrospect after stocks have recovered by 20%.  So, the timer starts today, and we won’t know the end until we surpass the market highs hit last October. Now let’s look at some statistics for Bear Markets since 1960 (sources The Wall Street Journal/Ned Davis Research):

Number of Bear Markets since 1960:  9

Average length of time: 14 months

Shortest Bear Market Time Period: only a few months

Longest Bear Market Time Period:  A little more than 2 years

Average market decline: 31%

Smallest decline: 21% (remember it has to be at least 20%)

Largest decline: 45% (during the 1970s oil crisis)

With this wide variety of declines and timeframes, we want to point out three investing tips and reminders that our long-time readers have seen before:

1.  Don’t think about trying to time the market, or think you know when the market bottom will occur.  We don’t try to time the market and don’t know of anyone who consistently can.

And please don’t just move everything into money market funds because you are nervous about losing more.  Remember - what’s important is where your balance is when you are retired, not when you are building up your savings.   If the drops in your investments are causing you to lose sleep at night, consider changing the level of risk in your investments.  Smart401k clients can get recommendations for reduced risk portfolios by signing into their account and retaking the Risk Tolerance Questionnaire.

2.  Make sure you realign (rebalance) your investments to your target allocation percentages.  This is a very uneven market - growth funds are outperforming value funds, domestic funds have been outperforming international funds.  Emerging Markets funds have experienced wild swings (the average China stock is down 48% this year, while South American company stocks are up slightly).  Chances are some of your investments have moved up or down significantly more than others.  If you don’t rebalance to your target percentages, its likely that your overall investment risk has changed.

3.  Don’t stop putting money into your account.  Someone once said that stocks and mutual funds are the only things that people don’t like to buy “on-sale”.  If you have a reasonable time horizon, history shows that the markets and most likely your investments will rise over time (but, past performance is no guarantee of future results).

One way to look at the current situation:  the markets would decline by about 10% more to hit the average decline of a Bear Market.  If we assume that someday the markets will recover, as they always have in the past, the recovery will be at least 20% - actually 30% from the average market low.  By the averages, the upside is greater than the downside.  The always agonizing question is ‘when will all this occur?”  Based on history, the answer is, we won’t know until it’s already happened.

One last statistic:  Number of Bear Markets where a recovery never occurred:  zero.

Scott Revare

CEO, Smart401k

Today we updated our Smart401k allocation recommendations to reflect how we believe our clients should currently invest in their 401(k).  (Note to current clients:  you view your updates by signing into your account at  https://www.smart401k.com/Login.aspx)

I’m telling you this because one of the most frequently asked questions we get at Smart401k is regarding how often we update client recommendations.  The answer is that we make an allocation update whenever we think market conditions warrant a change from our current recommendations, but at least on a quarterly basis. 

An allocation update is a change to the relative percentage holdings of the investments we recommend.  Our changes are based on intermediate-term economic trends (not short-term market ups and downs) and our perception of imbalances in different market segments (i.e. asset classes).  We also review fund recommendations and make changes when necessary during our regular plan fund reviews.

If you’ve been waiting for a good time to try our Smart401k service, now might be it. 

To learn more or sign up, please go to http://www.smart401k.com/Individual.aspx.  Anyone that is a client by July 7^th will receive our client-only newsletter that includes our 2^nd quarter recap and current market commentary, including an update from Adam Bold, our Chief Investment Officer.

Note that Smart401k serves clients with investments in any employer sponsored retirement plan, including 401(k), 403(b), 457 deferred compensation plans, and the Federal Government Thrift Savings Plan.

Scott Revare

CEO, Smart401k

A customer wrote us yesterday and told us that they didn’t need our advice right now because they had pulled all their money out of the market and put it into the money market fund in their account. While this is not the first time this has happened, it still bothers me a great deal whenever I hear about it.

There are certainly very legitimate reasons to move your retirement money into a cash-equivalent investment like a money market or stable value fund.  When you don’t have the time to ride out shorter-term ups and downs of the market, you may need to get more conservative with your money.  But the more frequent reason people pull out of the market is flat out nervousness.  Many people that get nervous about the markets are tempted to pull their money out before (they think) things could get worse.  When the market starts to go back up, the plan is to jump back into their original investments, reaping the rewards of future market gains. 

Well, I’m here to tell you two things: 

1.  Pulling out of the market whenever you fear further declines is a form of market timing

2.  Market timing is extremely risky and can easily cost you tens of thousands of dollars if your timing is off the slightest bit.  Read on to get the facts. 

Goldman Sachs Asset Management did a study that looked at market returns as represented by the S&P 500 Index from 1986 to 2006.  Here is what the data shows:

Stay invested in all 5,297 days of this study period, and the annual return is 12.12%

Miss the 10 best days and the annual return is 8.56% - a difference of 3.56% per year.

Miss the best 40 days and the annual return drops to 1.87%.

Miss the best 70 days and the annual return drops to -3.02%. 

As the data above indicates, if you are out of the market only a handfull of key times, your returns can be severely impacted.  What does this return difference mean in terms of dollars in your account at retirement?  Let’s say you just missed the 10 best days over the above 20 year period, saved $400 per month for all of those 20 years, and had a return on your investments of 8.6% (rounded for our calculator) per year.  You would have $254,500 after the 20 years.  Under the same assumptions, except if your return were instead 12% per year (rounded for our calculator), you would have $ 399,700 - a difference of over $145,000 (these are before tax numbers).  And that’s only 10 days! Imagine if you had missed the top 70 days, just over 1% of the days covered in the time period, and lost money! 

Given these numbers, is it really worth the risk of going in and out of the market?  We think not.

-Scott Revare

The returns listed are based on the S&P 500 Index, which is the Standard & Poors’ 500 composite stock price index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes.  Past performance is not indicative of future results.