You may be down, but you’re never out with a plan
For many investors, the end of the third quarter on Sept. 30 couldn’t come fast enough.
Plummeting broad stock marketing indexes — down 15 percent in just July, August and September — dragged every 401K with it and left account holders feeling significantly poorer and out of control.
Virtually every conversation I’ve had in the past few weeks with investors has revealed an extremely high level of frustration and sense of helplessness.
The feeling of the frustration I totally understand but the helplessness? … I’m not convinced it’s justified.
The problem as I see it is that people tend to ignore the investment options attached to their retirement accounts. And by not developing a system to actively manage these accounts, investors actually give up control of their accounts. This lack of control then tends to lead to some rash and rather detrimental decision making when investments start to head south.
For example, the first reaction some people have after a big decline is to stop contributing to their 401K. Justifying the action with a “Why should I throw good money after bad?” logic, this knee-jerk reaction often feels very right. But if done without consideration to or a plan for when you’ll start contributing again, it can actually work against you. Without a plan, you’re once again giving up control of your financial future.
Another reaction to a downward trend is to assume the investment world is beyond one’s ability to successfully manage. Some investors actually go so far as to take all their money out of the funds that are fluctuating and put them into a stable/ money market fund with no consideration to ever moving them back. This can be a very destructive long-term approach as the rate of returns on these stable investments rarely outpace inflation. In this case, a lack of a plan is really a plan for disaster.
So what’s the lesson to be learned from a terrible quarter? Control your controllables.
Monitoring and managing your 401K should be an active part of your life. By doing so, you can successfully develop a system to invest on your own and manage the money within your account to yield better returns. Granted, this will probably require some education and the development of a non-emotional, disciplined and proactive approach to financial management (i.e. be patient and impartial). It’s not always an easy thing to master in volatile times but over the long haul it yields strong rewards.
If you’re not sure you have a “keep calm and carry on” type of attitude needed to pull this off, you may want to seek out an investment professional to provide some guidance. Registered Investment Advisory firms actually specialize in offering 401K participant-level advice. Unlike brokers employed by broker/dealer firms, RIAs are typically fee-based, meaning they don’t receive compensation based upon the sale of products or the transactions recommended. Their interest is solely in helping you create a solid financial plan and keeping control of your controllables.
Now that, my friend, sounds like a plan.