When the stock market is volatile, invest like the 401(k) millionaires


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After months of avoiding going through the application for my 401(k) retirement account, I opened it and looked at my balance.

The stock market rebound has history on its side

Periodically, it’s a good idea to check how your retirement account is doing. This week my account was down 9.4% from a year ago. But when I looked at the three-year return, it was good, up 12.4%. A look back over the past few years puts today’s stock market fluctuations into perspective.

Sure, I’m down from the 2021 peak, but overall my retirement investment plan has worked exceptionally well over the years.

I know you have to stay the course, to avoid worrying about short-term losses, because investing for retirement is a long-term game. Still, it’s hard not to be overworked when your retirement funds take a hit. Once the stock market started its descent earlier this year, I just stopped watching my account. It’s not that I would have made any changes. I knew I would be extremely agitated if I saw how my balance had dropped.

But that’s the journey you take when you invest for your retirement. You have an investment plan, you put in your dues paycheck after paycheck, and you don’t make rash moves when the market turns volatile.

That’s what 401(k) millionaires do, according to Fidelity Investments, which analyzes savings behaviors and account balances for more than 35 million IRA, 401(k) and 403(b) retirement accounts.

When the stock market is crazy, follow the example of the 401(k) millionaires.

“We cite the 401(k) millionaire as an example of taking a long-term approach and staying the course,” said Mike Shamrell, vice president of thought leadership at Fidelity. “We saw that they were taking full advantage of the company game. They are quite aggressive savers and they are not afraid of equities.

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By percentage, the millionaires’ club is relatively small, less than 2% in plans managed by Fidelity, one of the largest workplace plan managers. Yet their savings habits and tenacity in turbulent markets are inspiring.

Prior to the pandemic and the economic havoc it wrought — inflation, rising interest rates, supply chain issues — the number of millionaires was rising dramatically among government officials and private sector employees.

The number of 401(k) millionaires in Q4 2021 jumped 32% from a year earlier. This upward trend ended in the first quarter of 2022, with an 8% drop in the number of workers at this elite club compared to the previous year. For the second quarter, the number of 401(k) millionaires fell nearly 28% from the first quarter of this year.

The number of millionaires investing in the Thrift Savings Plan had also increased. But their numbers have also declined, according to the Federal Retirement Thrift Investment Board. As of June 30, there were 28% fewer TSP millionaires compared to the previous quarter.

Many have been kicked out of the millionaire club over the past six months. But these long-time investors, who on average have been investing for about 28 years, stay in the stock market through tough times – the dot-com bust, the 9/11 terrorist attacks, the 2010 flash crash and the Great Recession. .

They are not discouraged by stock market declines. And this year, the decline has been significant.

The average 401(k) balance fell to $103,800 during the quarter, down 20% from a year ago. The average Individual Retirement Account (IRA) balance was $110,800, down 17.9%. The average 403(b) account balance decreased to $93,300, down 18% year-over-year.

What does staying on course look like?

Fidelity looked at three different savings strategies that 401(k) investors might have adopted during the Great Recession. Each hypothetical investor started with $400,000 in October 2007 in a portfolio of 70% stocks and 30% bonds.

In this hypothetical example, it is September 2008 and the US stock market has fallen 20% from its previous peak, which is commonly defined as a bear market. The first two investors panicked when their accounts fell to $352,000.

The first investor jumped out of the market, turned to cash, and stopped making contributions. The second also switched to cash, but continued to contribute to a business plan. The third investor kept the money invested and continued to contribute. These last two investors each had $15,000 in their 401(k) per year, including employer matching contributions.

In February 2012, the investor who cashed out and stopped contributing had $353,400. The worker who went cash at least started making 401(k) contributions again and had $404,709. The third investor had $524,600 sticking to the original investment mix.

When you’re a 401(k) millionaire, you know that past performance doesn’t guarantee future results. Yet history has shown that bad markets eventually gave way to better returns.

Historically, staying the course puts you in a position to benefit from the recovery, Shamrell said.

“They’ve been through a lot of pretty big economic events,” he said. “They’re a group that you can cite as good examples of understanding that retirement savings is a long-term approach and not reacting to some sort of short-term market.

During July, the S&P 500 rose 9.1%, enjoying its best month since 2020, Fidelity noted in its retirement report.

The 401(k) millionaire understands that staying the course is not a trivial phrase but a wise decision.

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