It is always a great learning experience for me to read academic research reports. Every once-in-a-while I find one that confirms the common-sense investment management approach that I have always preached to my individual company 401(k) retirement plan investment advice clients.
Last weekend, I read a new 49-page research report published by Klakow Akepanidtaworn of the Booth School of Business, Alex Imas of Carnegie Mellon, and Lawrence Schmidt at M.I.T. The title of the report is “Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors.”
The research found that financial market experts – institutional investors with portfolios averaging $573 million – fall victim to their systematic biases. The same thing goes for individual company 401(k) retirement plan participants.
The institutional or mutual fund managers that you have hired to manage your company 401(k) retirement plan mutual funds are clearly skilled in buying stocks. When the stock markets are going up, your company 401(k) retirement plan mutual funds go up as well.
What this research found is that these same investment managers underperform substantially in their decisions to sell stocks. Large institutional money managers don’t sell stocks in a timely manner during clearly declining stock market environments.
The research found that professional stock pickers don’t put nearly as much thought into selling stocks as they do buying stocks.
I have been preaching a similar investment management concept to my individual company 401(k) investment advice clients for the last 21 years. The only person in the world who really cares about the safety of your company 401(k) retirement plan principal in a down stock market cycle is you; or the investment advisor you have hired.
Mutual fund managers are hired and fired based upon their annual investment performance versus specific stock market benchmarks. Most mutual fund managers don’t beat these benchmarks on the upside. As this research concludes, even fewer mutual fund managers preserve the value of the mutual funds they manage on the downside.
Mutual fund managers rarely sell. It is always at good day for them to remain 100% invested in the stock markets. The fact that mutual fund managers generate more annual fees for their companies by remaining fully invested at all time is a topic for another blog post.
There is nothing fundamentally difficult about selling stock mutual funds in a clearly declining economic and stock market environment. All it takes is a “stop loss” stock market risk management investment strategy.
When the stock markets fall to a pre-determined level due to increased risks, I take the necessary principal preservation investment management steps for my individual company 401(k) investment advice clients. No emotional decisions allowed.
A logical, disciplined, and organized investment management strategy is needed for your company 401(k) retirement plan mutual fund holdings. This research proves that a principal preservation strategy is even more necessary in a declining stock market environment.
Ric Lager
Lager & Company, Inc.