Timing Markets With 401(k) Stocks? Bad Idea

Jack Bogle, the legendary investor and founder of Vanguard, has given the same advice over and over again—for years: Diversify the holdings in your 401(k), buy low-cost index funds, and don’t look at your monthly statements until the end of the year. But it’s hard to heed this advice in good times, and even harder when the waters get choppy.

In case you missed it, inflation fears have investors a bit jittery over the past several weeks.

The markets haven’t crashed. But the winds of correction are blowing all around us. We haven’t felt those concerns in a while, and younger investors may be feeling them for the first time.

But if you’re thinking about selling stocks and ETFs in your 401(k) accounts, trying to bail out before things get bad, think again.

Any reasonable financial advisor or planner will tell you this is a cardinal sin. Recent history—the last 60 years—will prove it. Market downturns happen, but you have to be able to stomach them if you want to win the long game.

Data from Alight Solutions, which tracks the 401(k)activity of individual investors, shows that 401(k) investors were particularly busy traders in 2020. Net transfers for the year as a percent of balance was 3.5% for the year, the highest level since 2008.

“Unfortunately, we saw many investors repeat the unfortunate trend of selling low and buying high that has been shown repeatedly throughout the more than 20-year history of the Alight Solutions 401(k) Index,” said Rob Austin, head of research at Alight Solutions. “The busiest days for trading were when the stocks were tumbling, and the trades overwhelmingly went from equities to fixed income.” 

“It wasn’t until the end of the year—when the market was setting new record highs—that investors traded back into equities.” 

Time In the Market, Not Market Timing

We are not smart or silly enough to predict what the markets will do over the short term.

No one is, and don’t believe anyone who promises otherwise. But remember that your 401(k) is not a video game or “fun money.” It’s your retirement vehicle and your light at the end of the tunnel.

If you want to play with stocks or try to time the market, get a brokerage account or learn to trade on our stock simulator.

Set up your 401(k) with an asset allocation that is right for you based on your risk appetite and your long-term goals. It’s OK to re-balance it occasionally, but if you try to use it to time the market, you may be digging yourself a financial hole that you will never be able to climb out of.

Roy Walsh

Roy Walsh

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