One of the things I enjoy the most about my business is that 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 big 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 Minnesota company 401(k) retirement plan participants really make stock market investment management decisions.
Kahneman and Tversky were the 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 found that investment losses are about twice as powerful psychologically as are investment gains to individual investors. It is psychologically more satisfying to not lose money in your company 401(k) retirement plan account than it is to try to “make money” in that same account.
I see this same psychology in my work with individual company 401(k) retirement plan participants. I see loss aversion behavior from clients I have worked with for over 20 years and from individual company 401(k) retirement plan participants that I meet for the first time.
Many individual company 401(k) retirement plan participants have a very vivid memory of their company 401(k) retirement plan account losses that resulted from the last great stock market decline of July 2008 to March 2009.
Individual company 401(k) retirement plan participants realize that they are not emotionally or psychologically equipped to make the necessary investment management decisions in their company 401(k) retirement plan accounts.
The recent stock market volatility has led to many individual company 401(k) retirement plan participants to become “frozen” in their investment management decisions. With a chance to repeat history, “buy-and-hope” and “stay the course” will find another opportunity to wipe away several years of company 401(k) retirement plan account stock market gains.
The preservation of your company 401(k) retirement plan account principal in the early stages of the next great stock market decline should be the number one investment objective now. This is especially important for 50-plus company 401(k) retirement plan account investors.
I am not talking about timing the stock market. Instead, I am talking about having an investment management strategy when the stock market music stops.
The U.S. stock markets are back up near multi-year high levels. Don’t try to fight both the U.S. economic and stock market cycles. Take notice of your own loss aversion behavior.
To remain fully invested in falling stock market may take years to recover. Just like it did in 2008-2009.
Ric Lager
Lager & Company, Inc.
