Noted NY Times money columnist Ron Lieber has some simple but difficult advice for people saving and investing for retirement – do nothing. Or, even easier, do not pay attention. This advice seems counter-intuitive to the trend towards financial wellness 401k maintenance, which attempts to engage people in their retirement saving and investing, so what gives?
Most people investing in their organization’s defined contribution (DC) plan already follow Lieber’s advice by setting it and forgetting it with a very few making any changes at all. Psychologists have proven that people feel more pain from loss that pleasure from an equal amount of gain. In an experiment made famous by UCLA’s behavioral finance Shlomo Benartzi, a monkey that gets one apple is happy while a monkey giving two apples with one taken away becomes very angry.
Fidelity Investments studied DC account holders after the 2008/09 market crash and found that 16,900 of the 61,900 who sold off all stocks and never reinvested wound up with a 27.2% gain including contributions. Those that re-engaged enjoyed a 157.7% increase. So Lieber’s suggestion to look at your account balances less often and to turn off notification might make sense when markets are falling.
But what about expert advice to re-balance our accounts? When certain sectors go up, it inflates the percentage of money we have in one asset class which can thwart asset allocation. That’s why experts are also recommending the use of professionally managed money like target date (TDF) or target risk funds that automatically re-balance money for us.
Though many critics of TDFs think that the methodology is too crude and does not take into account outside assets, salary, account balances, deferral rates or access to a pension plan, money keeps piling into TDFs at a rapid rate making Lieber’s advice to do nothing and do well appropriate.
