How’s your (client’s) 401k doing? Provided events in the Middle East don’t tank the markets, the January Effect could be particularly good this year.
The January Effect, a seasonal anomaly that usually sees an increase in equity investments simply due to investor optimism, had an enormous bull market at its back to start a new year, and The Wall Street Journal, citing Thomson Reuters Lipper data, found the average U.S.-stock fund soared an astounding 28.3% for all of 2019.
International-stock funds (whether in or out of an employer-based plan) rose 23% on average, and bond funds also rose. Funds tied to intermediate-maturity, investment-grade debt rose 8.7%.
It was quite the turnaround from 2018, “when U.S.-stock funds fell 7.7%, international funds 15.5% and bond funds 0.7%.”
“Even so, investors continued to hedge their bets, bracing for a slowdown in the nearly 11-year bull market—pouring money into bond funds rather than stock funds,” the paper reported.
“All of this points to our view that the average investor should be thinking more defensively,” Lauren Goodwin, an economist and strategist for New York Life Investments, told the Journal.
Indeed, her advice matches recent data specific to the 401k space, with Illinois-based Alight Solutions noting that Q3 of 2019 was the seventh consecutive quarter where net trades favored fixed-income funds over equity funds, meaning defensive moves were underway, despite solid equity appreciation.
Better participant behavior
The findings are an indication of better investor (and retirement plan participant) behavior in recent years. Widely-reported analysis from the Investment Company Institute found that in 2000—the tech bubble’s top—investors poured a record amount of net new cash into equity mutual funds, while pulling money from bond funds.
In 2002, during the market bottom and the throes of the bubble’s burst, investors pulled from equities to pour another record amount back into bonds.
In other words, they did exactly the opposite of what was warranted, making the classic (and maddening) market mistake—buying high and selling low, which frustrated and confounded advisors., but now appears to no longer be the case for many investors.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
