[For part one of the three-part series, click here.]
The second leg of “The Big Three” for retirement plan participants is consistency.
It may not be obvious, but the historical data supports the premise that the more “doing” that happens with retirement investments, the more likely returns suffer. The more tinkering done with an investment allocation, the worse the outcome tends to be.
Among all of the behavioral biases, a short-term focus driven by “patterns” is perhaps the most damaging. A recent blog post by Nick Maggiulli on the subject is required reading for all advisors and plan participants.
Advisors and participants too often believe they see something on the horizon that will lead to a portfolio decline (rarely, if ever, do they see something positive on that horizon).
Believing as they do that they can avoid the inevitable (and temporary) declines endemic to equity markets, they are motivated to act—usually selling some, or all, of their equity positions. They choose to ignore the fact that equity markets have historically risen more than declined over 90 years.
For example, when analyzing the S&P 500, it has been up:
Daily – 54 percent
Monthly – 63 percent
Quarterly – 69 percent
One Year – 75 percent
Three Year 84 percent
Five Year – 88 percent
10 Year – 95 percent
20 Year – 100 percent
Source: Michael Batnick, CFA and Dimensional Returns Data 2.0
The fact is that shouldn’t change a long-term allocation to avoid a short-term correction, as it’s virtually impossible to time that exit/entry; not just once, but every time the markets move a few percentage points one way or the other.
Simply put, missing out on time invested is far costlier than any of us would typically imagine.
How many of us were spooked by the 2016 presidential election and reflected our fears in our retirement savings allocations? How do we go back and get those returns on which we missed out?
We can’t. What we can do is learn our lesson and avoid similar behavior in the future.
Here’s the hypothetical value of $1.00 invested from 1997 to2016, a total of 240 months. If you missed 13 of those months (5.4 percent of the total time) look at what happened:
Source: Morningstar, Inc.
Retirement Investors need to remain invested. If one were to do anything in the face of a market correction, one could consider Increasing their equity allocation with new dollars they’re contributing, which is the subject of a future article
For now, think about making any change to a retirement portfolio allocation in the context of what is trying to be accomplished, and where there is control. The media will always hype bad news and the Wall Street product machine will always prey on fears, offering products that tout all sorts of supposed safety.
Ignore them. Make deferrals, keep the allocation, re-balance periodically. The portfolio will be just fine.
Dan McConlogue, AIF, PPC, is director of corporate retirement plans with Ritholtz Wealth Management.
Dan McConlogue, AIF, PPC, is director of corporate retirement plans with Ritholtz Wealth Management.
