It would appear that the majority of Americans with retirement accounts have really been sweating it out during this latest round of Wall Street negativity.
The Wall Street Journal is reporting that Fidelity’s website saw web traffic increase 25% higher than it’s all time high last week amid the flood of negative financial news. Similarly, TIAA-CREF reported that customer service call volume was up 30% above normal call volume.
No big deal – right?
In all likelihood, people are checking up on their retirement accounts to do one of two things: check their account and wondering/asking how to prevent further losses [good idea], or check their account and potentially reduce their contributions or remove their funds entirely [bad idea].
After seeing the aforementioned WSJ article, it piqued my interest so much that I sent out emails to family & friends whom I discuss the investing world on a regular basis. I asked these two simple questions:
Have you recently called your retirement account adviser or logged into your retirement account to assess your recent losses?
Would you consider reducing or halting your contributions to your retirement plan?
Out of the 19 responses I received (hardly enough to be statistically significant but important nonetheless), I found a few responses somewhat troubling.
A total of 17 of 19 people had checked their retirement account. The two that did not are die hard investors and have been doing so for 15+ years, so it’s not at all shocking these two people ignored the market news. Plus, they’re both in the medical field and spend their day’s looking at X-rays or opening up some poor patient’s chest cavity.
The troubling results were that 3 of the 19 said they would consider reducing their 401k contributions, and 1 was planning on doing this within the year if market conditions did not improve.
Problem is, this 1 person is in his late 20s. I’m not a certified financial planner, but I think I could speak for the entire industry when I say this is a poor decision on his part, and they would likely back me up by preaching this opinion until they were blue in the face.
So what does all this mean?
It means that it is entirely acceptable to allow a little panic or bad news to influence your decision making. We wouldn’t be human if we didn’t. The big problem arises when you allow fear to influence your rational behavior, as indicated by the 1 individual that plans on reducing his contributions unless the market corrects itself by year end.
What should we do?
The first thing to do is consider the amount of time until your retirement. If you’re 30 to 40 years away from retirement (like me and the others in this small case study), building a diversified portfolio of equities during a sell off in the broad market is like finding a gas station selling gas at a 20% discount. You’ll shake your head and wonder what the problem is, but you’ll certainly pull in and fill up as much as you can to take advantage of the opportunity while it’s available. Conversely, if you’re nearing retirement or already retired, then a large portion of your funds should be in fixed income investments.
Second, if your employer matches your 401k/403b contribution, they are essentially giving you free money to fund your retirement. So if you absolutely must reduce your contribution, reduce it only to levels that qualify you to receive the full employer match. Personally, I’m adding the maximum amounts I can possibly afford to my retirement accounts and I’m hoping it pays off since I have 30 years to go before I can play shuffleboard with the old geezers at the retirement home.
Lastly, turn off the financial news. JD at Get Rich Slowly probably has the most succinct rationale I’ve seen to date about why it pays to ignore the financial news. Even with the drama of last week’s bailouts and bankruptcies, the S&P 500 index only changed a total of three points for the entire week which really shows the power of diversification.