Some Things Are Better Left Alone
Many financial planners discourage frequent trading and attempts by investors to “time” the markets. Their logic is based on numerous studies and research that indicates that individual investors generally damage their long-term financial returns by trading too frequently. DALBAR publishes annual research results that consistently illustrate underperformance on average by individuals relative to general market returns. For example, in 2018, the average individual investor lost 9.42% while the Standard & Poor’s 500 lost only 4.36%. The reason? Too much trading activity and over-reaction to market developments.
A recent report from Alight Solutions indicates that 401k participants have continued this troubling trend. The arrival of the coronavirus on U.S. shores has brought with it a market panic which 401k investors have joined. The final week of February was one of the busiest in the 20-year history of the Alight Solutions 401k Index and the activity total for this single week was greater than the entire 4th quarter of 2019. During the month of February, 0.046% of 401k balances were traded daily, the highest level since August 2011. On February 28, net trading activity was 15.8 times the average daily level.
Clearly, 401k investors have joined the trading frenzy and it appears their motive was to preserve the value of their 401k accounts as opposed to taking advantage of lower equity prices. The three asset classes that received most of the inflows were bond funds, stable value funds and money market funds. As of mid-March, this asset shift has proven to be the correct action as the equity markets have continued to fall. On March 11, the stock market entered “bear market” territory when the retreat from the most recent market highs exceeded 20%. The big question however, is will these 401k participants repurchase equity mutual funds soon enough to benefit when the market eventually recovers its lost ground? History has shown that successfully “timing” the market is very difficult, even for professional securities traders. Perhaps, it will be different this time for these individual investors but past history has not been on their side. Only time will tell.