401(k) Is Falling

 

Your 401(k) Is Falling Behind. Here’s What You Should Do.

How to know when it is time to take your portfolio off autopilot

The investing strategy millions of Americans rely on to secure a good life in retirement hasn’t worked lately. They should probably stick with it anyway.

Most people keep their 401(k) on autopilot by investing in a diversified portfolio of stocks and bonds. Faith in this approach has been shaken by three years of losses in the bond market. 

It is being further shaken now. With yields on government bonds around 5%, some are thinking of taking money out of stocks to put it into bonds.

As tempting as it may be to meddle with your investments, history suggests most investors have a lousy record of timing the market. Financial advisers say the vast majority of Americans should stick to time-tested advice and simply do nothing.

“Just because your strategy has a bad year or two doesn’t mean you should make changes,” said William Bernstein, a financial adviser and author of “The Four Pillars of Investing.” “Even the best strategies are going to have a bad year now and again, so the best thing you can do is pick an investment mix that’s reasonable and stick with it.”

Investors’ desire to take their nest eggs off autopilot is understandable. In 2022, a balanced portfolio evenly split between stocks and bonds lost 15.5%. This year, a 50/50 portfolio is up about 7.9%, even as the S&P 500 index has risen 16.6%.

Meddling with your 401(k) is a major step that can leave investors worse off than if they stick with a balanced portfolio. Bonds have performed poorly in recent years, but both bonds and stocks still play a vital role in building retirement security. 

Stick with target-date fundsAmericans have funneled a large percentage of their 401(k) savings into target-date funds, which shift from stocks to bonds as retirement draws nearer. Designed to give investors a set-it-and-forget-it approach, they are the default options in many plans.

These funds have struggled recently. Portfolios for people planning to retire in 2040 fell 17.3% in 2022 before rising 3.7% through Oct. 31, even as the S&P 500 gained 10.7% including dividends over that time.

Funds that combine stocks and bonds tend to earn steadier returns than those that invest in a single asset class, such as stocks, although they can cost slightly more. That makes it easier for people to stick with stocks, which have greater growth potential than bonds, in bad markets, said Amy Arnott, a portfolio strategist at Morningstar and co-author of the report.

“Target-date fund investors leave their investments alone, which is the best thing to do if you’re trying to build long-term wealth,” Arnott said.

In 2022, only 2% of target-date fund investors traded their holdings, versus 11% of other 401(k) investors, according to Vanguard. Studies have found that investors who trade frequently are more likely to buy after rallies push prices up and sell when markets are depressed and their holdings are beaten down.