It can be tempting, especially during periods of market strife, to drastically change your investment portfolio or pull your money out of it. But unless you’re a stock expert, here’s a bit of simple advice: don’t.
This is not to say you should never check in on your retirement accounts, including 401(k)s and IRAs. The question then is, how often should you check on them?
According to several experts who have written on the topic, the answer is, at most, twice a year. The market can be finicky, going up or down because of many factors, some serious and others less so (see the January Effect, where smaller companies usually do better on Wall Street in January). Less experienced investors read these signs that they should take action, while those with a long-term view now suggest that inaction may be the best action.
Billionaire investor Warren Buffett’s mentor, Benjamin Graham, explained the stock market as a voting machine in the short term and a weighing machine in the long term. We all know that people are fallible and prone to bad decision-making, so you can read Graham’s advice as to not follow the herd.
Science adds weight to Graham's imaginative metaphors. A study by researchers at the University of Missouri’s College of Human Environmental Sciences and published in The Journal of Retirement found that inexperienced investors are more likely to put their money into target date funds. These investments are a mix of stocks and bonds that change based on a person’s age. They are typically offered by employer-provided retirement plans.
Warren Buffett and Benjamin Graham aside, the stock market is complex entity. Surrounding it are a seemingly endless number of shouting heads, both online and on TV, who will gladly tell you what's up and what's down and what's up again. To a newbie, it can all seem a little intimidating. Why not just put money in the bank?
“If a potential investor without experience or knowledge is looking to invest in the stock market in order to build retirement wealth, it is not advisable for them to jump in and start investing in individual stocks, since they will be more likely to make investment mistakes,” study co-author Michael Guillemette said. “Target date funds allow these unsophisticated investors to enter the investment world in a way that minimizes the opportunities for them to make mistakes. TDFs help minimize those mistakes by doing the legwork for the investors, so this trend we identified is great news, especially for those who have already been investing in TDFs for several years.”
What makes TDFs so appealing? They’re based on how much risk an individual wants, based on factors such as age, and you don’t need to monitor them. A check-in once in a while works well, and as you get older, you can change your mix of stocks and bonds to be on the safer side.
So sit back, try to relax, and let your account grow on its own.
Abstract:The Pension Protection Act of 2006 identified target-date funds as an appropriate default investment for defined contribution retirement plans. Using the 2009 National Financial Capability Study, this paper examines the relation between investor sophistication and the decision to primarily invest retirement assets in target-date funds. The results show that Americans with low investor sophistication are 22.2% more likely to primarily use target-date funds to save for retirement, compared to highly sophisticated investors. It is possible that the Pension Protection Act created a positive economic impact given that this paper provides evidence that investors who stand to benefit the most from target-date fund investment are the ones who are more likely to use the product.