A funny thing has happened on my journey providing investment advice to individual company 401(k) retirement plan participants over the last 22 years. It’s the mental and emotional arithmetic used by 401(k) investors dealing with stock market gains and losses.
Individual 401(k) retirement plan participants measure the growth of their retirement account savings in percentages. When asked, most 401(k) investors can quickly respond with the percentage of their retirement plan growth over the last year.
In the last few weeks, my primary physician, dentist and dental hygienists, local auto repair shop owner, pharmacist at Walgreen’s, work out buddies at the health club, and parents of kids who went to grade school with my kids, all have made glowing statements to me about the percentage of growth of their company 401(k) retirement plan account.
Conversely, these same individual company 401(k) investors measure their stock and bond market losses in dollar amounts. Even casual 401(k) investors remember the dollar value loss of their company 401(k) accounts in March 2020.
Percentage of gain on the way up. Dollar amount lost on the way down. I am sure there are deep psychological explanations involved here. But don’t ask me.
In the past week, inflation worries have dominated the business news and stock market concerns. There is a wake-up call to the fact that stock market risk can rear its ugly head very quickly.
Now is the time to think about the preservation of the dollar value of your company 401(k) retirement plan account.
Regardless of your age or stage of your working career, there is a finite limit of risk that any individual company 401(k) investor can take. You can’t spend without limit on your personal credit cards. Likewise, you can’t lose unlimited amounts of 401(k) account principal without severely damaging the timing of your desired retirement.
You likely own one or two mutual funds in your company 401(k) account that are responsible for most of your stock market risk now. These mutual funds lagged the overall stock market averages on the way up. The danger suddenly is they will most likely fall faster than the stock market averages on the way down.
Take the time now to figure out just how much stock market risk, or dollars lost, you are willing to take. If the current stock market weakness continues into the summer months, how much dollar loss of your company 401(k) account principal loss is enough?
For years, most individual company 401(k) participants have been able to get away with the “buy-and-hold” investment management strategy. The luxury of continuing to take a “hands off” approach to your 401(k) account may be coming to an end.
Ric Lager
Lager & Company, Inc.
