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Rating:Staying the Course Isn't all Good News Not Rated 3.0 Email Routing List Email & Route  Print Print
Friday, May 19, 2000

Staying the Course Isn't all Good News
Guest Column by: John Rekenthaler

Recently, Hewitt Associates stirred up headlines with the news that during April's market volatility, 401(k) investors barely budged. On the busiest day of the month, April 18th, investor activity was only slightly above normal levels -- meaning that only a tiny fraction of 401(k) shareholders changed their investments. This was widely heralded as the best of all possible news.

Other Columns by John Rekenthaler

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Coming Soon: Self-Directed Accounts

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The Silent Majority

Well, sort of. Certainly there is much to celebrate. The history of the financial markets is a history of periodic losses sparking panic, panic begetting transactions, and transactions leading to regret, after the assets that were so rashly dumped outgain those that were bought. That the 401(k) investor is seemingly cured of this affliction is heartening.

On the other hand & the dead make few trades. A less-charitable interpretation of April's events is that most 401(k) investors don't know what they own, don't care what they own, and therefore can't be shocked by even the worst news into taking action. Such a belief would be consistent with the fact that the median number of trades made by the typical 401(k) participant over the lifetime of said account is zero, according to research by Harvard's Richard Zeckhauser.

That's a problem. Yes, today's 401(k) investors do favor equities, as is appropriate for long-term accounts. But that doesn't mean that they are all well-positioned. Many participants hold weak, high-cost funds, while others are overloaded in a particular industry sector (most commonly, technology.) Consequently, they run the risk of significantly trailing the market averages and having a materially lower retirement lifestyle. What's more, not everybody should be heavily invested in stocks. Asset allocations that were appropriate a decade ago may have well become too aggressive, as the investor ages and moves closer to retirement.

So let's not automatically cheer simply because 401(k) fund redemptions remained low through the recent market turbulence. Instead, let's seize the opportunity to probe participants and see why activity was so muted. Was it a conscious decision? Or the product of neglect? If the former, then truly we have created a nation of patient, informed investors. If not-as I suspect-then further education efforts are in order.

The views presented in this article represent those of the author and do not necessarily represent those of InvestmentWires, Inc. InvestmentWires, Inc. does not guarantee the accuracy, completeness or timeliness of, or otherwise endorse, these views, opinions or recommendations, give investment advice, or advocate the purchase or sale of any security or investment.  

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