One of the things I enjoy the most about my business. I make time to read the great investment management books of our time. These books include economics, behavior, and investment management strategy.
I am a huge fan of the work of psychologist Daniel Kahneman. His work, along with his late partner Amos Tversky, has taught me a great deal. About how 401(k) participants make investment management decisions.
Kahneman and Tversky were behavioral psychologists. Who first demonstrated the theory of loss aversion. Loss aversion refers to an investor’s tendency to prefer avoiding losses. Rather than acquiring gains.
The research work done by these two brilliant psychologists was groundbreaking. They found investment losses are about twice as powerful psychologically as investment gains. It is psychologically more satisfying to not lose money than it is to try to “make money.”
I see this same psychology in my work with 401(k) retirement plan participants. I see loss aversion behavior from clients I have worked with for over 30 years. And from 401(k) retirement plan participants that I meet for the first time.
Many 401(k) retirement plan participants have a very vivid memory of last year’s 401(k) account losses. Many remember their 401(k) turning into a 201(k) during the last great stock market decline of July 2008 to March 2009.
401(k) participants realize they are not psychologically equipped. Or emotionally capable. To make 401(k) investment management decisions.
The recent stock market volatility has led to many 401(k) participants to become “frozen.” Making no investment management decisions.
There is a huge chance of repeating history. “Buy-and-hope” and “stay the course” may have another opportunity. To wipe away several years of 401(k) stock market gains.
The preservation of your 401(k) principal is vital. In the early stages of the next great stock market decline. It should be the number one investment goal now. This is especially important for 50-plus 401(k) retirement plan account investors.
I am not talking about timing the stock market. Instead, I am talking about having a 401(k) principal preservation strategy. When the stock market music stops. And interest rates begin to rise.
Do not try to fight both the U.S. economic and stock market cycles. Or the Federal Reserve raising interest rates. In fact, the highest inflation rates in decades.
Take notice of your own loss aversion behavior. Put a plan in place now to preserve your 401(k) principal.
To remain fully invested in a falling stock market. Or rising interest rates. Both strategies are foolish and unnecessary.
It may take years to recover. Just like it did in 2008-2009.
Ric Lager
Lager & Company, Inc.
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