The Savage Truth on Money
The Employee Benefit Research Institute and the Investment Company Institute studied real-life retirement accounts and found that at year-end 2012, the average account balance of the “consistent participants” was 67 percent higher than the average account balance of all participants in their huge database of 24 million plan participants. Within that group, only about 7.5 million were considered consistent participants.
Even more impressive, the consistent investor group’s median account balance increased at a compound annual average growth rate of 11.9 percent over the period — almost three times the median balance of all participants (including those who made adjustments out of stock funds, stopped contributing for a part or all of the period or otherwise did not stick to their plan).
What’s clear from this study is that self-discipline in staying with an investment plan is one of the key ingredients of success over the long run. Or to put it more obviously, there are a lot of people kicking themselves for selling out at the bottom in March 2008, with the DJIA below 6800. But of course, panic selling is what makes market bottoms. All those people who figured they couldn’t take one more day or one more dollar of losses guaranteed the success of others who were either smart or paralyzed by fear and continued to invest.
Target Date Funds Give Stock Exposure
The study also confirms the benefit of Target Date funds, which became a “safe-harbor” default option for 401(k) plans in the past decade. That is, instead of “defaulting” employee contributions into money funds, plan administrators were encouraged to automatically put contributions into target date retirement funds. These funds are designed to adjust the investment mix as participants near retirement age. That exposes younger participants to more stock market investments, despite their very human fear of “losing money.”
While there is still great debate over whether target date funds perform better than a portfolio of well-chosen mutual funds, the overall benefit is clear. Most employees don’t have the experience, interest or discipline to choose and rebalance the various mutual funds that are offered in the plan. The target date funds will at least give them some of what is good for them! And they are more likely to stick with these investments, figuring (not really accurately) that “someone else” is looking out for them.
The study shows that at year-end 2007, 27.6 percent of those “consistent participants” in 401(k) plans held at least some target date funds in their accounts. And by year-end 2012, that number had grown to 32.1 percent holding some target date funds.
The younger employees are really getting the message. Nearly 44 percent of employees in their 20s had target date funds in their 401(k) accounts at year end 2012, compared with 28.4 percent of participants in their 60s.
Now, What at Dow 17,000?
The worst thing about getting out at the wrong time is that you then have to figure out when to get back in!
Today, at Dow 17,000, those who sold are wondering whether it’s too late to invest in stocks. And there are enough of them sitting on the sidelines, plus all the money sloshing around with few other investment alternatives, to keep pushing the market higher.
Despite the Fed’s most recent plan to cut another $10 billion from the stimulus plan, there is a lot of money already out there — wondering where to go. And as long as other central banks — Japan, EEC and even China — are saying they will keep creating liquidity to get their economies growing, there will be plenty of fuel for the market fire.
No one ever knows when the market has reached its top. (Well, in every cycle there is at least one person who sells at the top and brags about it later!) And history shows that on the way to the top there are many who predict the end of the Bull Run is near.
One of the few who consistently have called market turns is Jim Stach, publisher of the Investech Research newsletter (investech.com). His most recent issue details the history of media headlines using the word “boom” as a guide to market peaks. Hint: We are only just approaching this stage, which can continue for many months before a market decline. I recommend Stack’s newsletter above all if you are still trying to “time” the major turns in the stock market.
But for most people who are trying to build up a retirement plan over the long run, the EBRI study shows that if you will make a plan of regular stock market investing — and stick to that plan when everyone else is ruled by fear and greed — then you will come out ahead in the long run.
It’s good to have that proof, and there are at least 7.5 million 401(k) plan participants who can show that proof in their retirement account balances. That’s the Savage Truth..
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, “The New Savage
Number: How Much Money Do You Really Need to Retire?”