Tempted to bail on stocks? Learn this lesson from 2008 data

Past performance is no guarantee of future results, as the saying goes. But a new Fidelity Investments analysis of what’s happened to retirement investors’ portfolios since the 2008-2009 market crash is worth considering if you’re tempted to pull money off the table during the market’s current volatility.

The big message: Investors who held on tight through the harrowing 2008-2009 crash have been richly rewarded since then.

Fidelity looked at the performance of 7.1 million 401(k) accounts, comparing returns for investors who made changes to their portfolios during the 2008-2009 market crash up through June 30th this year — a point when the market was on an upswing preceding the steep drops and volatility that began in late July.

The key findings:

  • Participants who changed their equity allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009 and stayed out of stocks through June 30th this year saw an average increase in account balance of only 2 percent.
  • Participants who exited stocks but then returned to some level of equity allocation after that market decline saw average account balance increases of 25 percent.
  • Investors who stuck it out with a continuous asset allocation strategy that included stocks had an average account balance increase of 50 percent.

Fidelity also looked at participants who stopped contributing to their 401(k)s during the 2008-2009 crash; they experienced an average increase in their account balances of 26 percent through the end of the second quarter, compared with 64 percent for those who kept making regular contributions.

Only a very small percentage of Fidelity’s 401(k) investors withdrew entirely from the market. Less than one percent of account holders (0.8 percent) bailed on all their equity investments during the 2008-2009 crash and stayed out entirely, according to Beth McHugh, vice president of market insights at Fidelity. And among investors who had been actively contributing before the crash, only 1.4 percent stopped doing so as a result of the downturn.

Among those who reduced their equity contribution to zero at some point during the period measured, half were over age 50. “Often there’s a lot of speculation about participants taking money out of the market, but inertia does take hold as a result of the automatic nature of many 401(k) plans,” she says.  It’s true that most workplace retirement savers tend not to manage their accounts actively – behavior that has accelerated as more plans add automatic enrollment, automatic contribution levels and target date funds that hold investor accounts to specific equity allocation levels tied to their proximity to retirement.

As of June 30, 98 percent of Fidelity plan sponsors offered a lifecycle investment option, and 52 percent of participants were using them. Fidelity says 46 percent of plan participants are 100 percent invested in target date funds.

Today’s market response
During the market’s recent volatility, McHugh says Fidelity saw a 50 percent spike in telephone call volume to its service centers during the market’s worst days last week. “Customers have questions and concerns, and they wanted to be able to get through to us by phone,” she says. “But call volumes and transactions have gone back to a normal level since then.” (article credited to: reuters money)

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