Some 401 (ok) buyers switched to fastened revenue and should have missed the rally
With the US stock market now on its way to its best week since April, some 401 (k) Plan participants started the week with more trades than usual in their retirement accounts.
As a result, they may have missed this post-election rally.
Daily trading in 401 (k) plans – traditionally viewed as a place to buy and hold investments – sped up significantly at the start of the week after a few turbulent days for the S&P 500 index. On Monday, 401 (k) investors who had done trades mainly switched money from stocks to fixed income securities. However, a post-election day rally has whipped major stock market averages up to their biggest weekly gain in about seven months.
Investing in 401 (k) plans was more than double the normal daily average (or about 0.06% of the balance) on the eve of the US presidential election, according to 401 (k) vendor Alight Solutions. Investors switched mainly from stocks to fixed income on Monday, a recurring theme over the past few weeks.
Although investment activity in 401 (k) plans was close to the normal daily average on election day and the day after, experts say this trade needs to be watched closely.
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“There has been a lot of uncertainty about who will become president and people are taking that uncertainty and they worry that if Biden wins or Trump wins, something bad will happen,” said David Blanchett, director of retirement research at Morningstar.
“We don’t really know what’s going to happen to the market regardless of who is president,” he added. “So it makes little sense to act with today’s uncertainty.” After all, a 401 (k) account is an investment designed to save for the long term for retirement.
While tracking the daily data of more than 2 million 401 (k) investors, Alight found that trading activity on Monday was lower than the day before the 2016 US presidential election, and action was quieter in the days that followed. However, the 401 (k) daily activity this week could still be following a trend that emerged four years ago.
The 2016 US presidential election result “came as a shock to many, many people – the polls were wrong and the decision was quick,” said Rob Austin, vice president of research at Alight. “People reacted to the surprising news.
“However, in 2020 there was an expectation that this election could be a long and drawn-out process that appears to be bearing fruit,” he added.
“People could act on the decision instead of voting,” Austin said. “We could see more movement in retail once the choice is made.”
In 2016, the biggest trading day in 401 (k) plans – this year, and at that time, according to Alight, of all time – was the day after the presidential election, when many saw a surprising outcome. Net trading activity on November 9, 2016 was 4.5 times normal trading levels (or approximately 0.10% of the 401 (k) balances) with money flowing into fixed income securities.
It’s not certain that this kind of jump into 401 (k) investing activity will happen once a winner is announced in the 2020 U.S. presidential election, but uncertainty is fueling recent activity in some accounts, experts say.
“Whenever there is an event of uncertainty or volatility, people tend to act because they are transferring their emotions to their 401 (k) portfolio,” said Blanchett. “And that’s usually not a good thing.”
After all, participants who switched around 401 (k) money from stocks to fixed-income securities and kept them off the stock market in November 2016 missed quite a run. Since then, the S&P 500 has risen more than 60%.
Instead of trying to time the market, the 2020 election should be viewed as “a bit of a litmus test” for 401 (k) participants, according to Blanchett. “Do you like your current portfolio?” he asked. “If you don’t, you could be at the wrong place.
“Find one that makes you feel comfortable in the long run because moving back and forth in markets makes people less wealthy in the long run.”
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