Your 401(k) Is Up. Don’t Let It Go to Your Head.
Dec 22, 2023
There are pitfalls
to checking your balance too much—even in good times
Checking your 401(k) is the feel-good move of the year.
After last
week’s stock-market rally, it now feels safe to peek at your 401(k) balance
again. That is a relief for the millions of people whose retirement accounts
are still recovering from the bruising
they took in 2022, when the S&P 500’s total return was -18.11%.
Vanguard’s 2030 target-date fund,
which is geared to people retiring around that year, is up 14.50% in 2023
through Friday, according to FactSet. Its 2060 fund, which has a longer time
horizon and more in equities, is up 18.21%. Those same funds were down 18.35%
and 19.17% respectively in 2022.
Don’t let your self-worth balloon along with your net worth,
financial advisers warn. They say the overconfidence that comes with making big
gains can cause people to take bigger risks with their investments.
“With
the S&P up more than 20%, you don’t have to be that smart to have made a
lot of money” this year, said Scott Nations, an options trader and the author
of a book about the psychology of investing. “It makes us feel like we’re
savvier investors than we really are.”
Neuroscience
backs up the idea of overconfidence being a problem. Increases in dopamine, a
brain chemical that likely gets released when you see large returns in your
account, can lead to more financial risk-taking, research on the brain has
found.
You
can still celebrate a little.
Some
retirement savers have cheered the performance of their 401(k)s on social
media, noting they look forward to hopefully getting to spend the money in
coming decades.
The
Federal Reserve’s forecast
last week of three rate cuts in 2024 had an instant impact on this
year’s returns. All three major stock indexes rose, with the Dow Jones
Industrial Average ending the day up 512 points at a record close.
The
average 401(k) balance at Fidelity Investments was $107,700 at the end of
September, per the latest data from the firm. That marks an 11% year-over-year
increase, even before the market’s fourth-quarter rally.
“What’s
important is for people to not get attached to that number and feel like,
‘That’s mine—it belongs to me,’” said Suzanne Shu, a professor at Cornell SC
Johnson College of Business. “The more you feel that ownership, the more
painful it is if it falls again later.”
Don’t stare
Constantly
logging into your retirement account whether it is up or down is both
emotionally taxing and possibly harmful to your net worth, research
indicates.
Behavioral
economists Shlomo Benartzi and Richard Thaler found that investors
with longtime horizons who followed the market more closely had
lower returns, likely because observing market volatility made them more
scared of stocks.
When
stocks are up, it is dangerous to assume they will only keep climbing. Joe
Goldgrab, an executive wealth-management adviser at TIAA, said he heard from
several clients last week who were sitting on uninvested cash and told him they
were finally ready to put it into the market.
He
said he reminded his eager clients of the risks of buying high, and advised
them to consider committing a smaller amount and doing so incrementally instead
of all at once. (In the meantime, he said, they can stick it in a high-yield
savings account.)
“I’m
guilty of looking at my accounts and seeing how they’re doing and getting that
rush of happiness,” Goldgrab added. “But I also have the discipline to say,
‘Hey, I’m not going to take money that was earmarked for another goal and
suddenly put it into the stock market.”
Keep
your 2023 gains in perspective, because people often overestimate how long a
nest egg can last. That is in part because we are more used to thinking of our
income and expenses on the scale of a month than lumped together over decades,
said Hal Hershfield, a professor at UCLA’s Anderson School of Management.
“One
danger in looking at that lump sum as it’s gotten bigger is the perception that
it may afford more adequacy, satisfaction and purchasing power in retirement
than it actually will,” he said.
An action plan
If
you’re currently paying more attention to your retirement savings than you
otherwise would, now is a good time to do some upkeep on your account, said
Valerie Rivera, a financial planner and the founder of FirstGen Wealth in
Chicago.
Rivera recommends making sure that the level of risk in your
portfolio matches your life stage, buying or selling holdings to rebalance your
allocations based on your investing plan and seeing if you can afford to bump
up the amount you’re contributing with each paycheck. (She notes these are
things you should be doing once or twice a year anyway.)
Rivera
also advises looking
into a Roth 401(k), which grows tax-free, and inspecting the fees
that come with each of your investments. Try to stick to investments with an
expense ratio of 0.5% or less, she said.
Tackling
these to-do’s now, when you’re feeling better about your balance, might help
establish a positive association with these financial chores that many people
dislike or forget, Rivera said.
“Maybe
the next time is summertime, and maybe you have your laptop in your yard while
you have your feet in the pool and you’re having a beer,” she said.
Source: Wall Street Journal