I was invited to speak to a nice group of people at Walsh College in Troy, Michigan last night. One woman asked, “What do you say to someone who messes with their 401k non-stop?”
btw: Thanks, Greg, for the invite! Hopefully I didn’t bore your students silly.
Let’s face it:
90% of us fall into one of two camps:
1) You obsess over your 401k and tinker with it constantly.
or
2) You only remember you have a 401k or IRA plan when the statement arrives.
I’d say that nearly 90% of the 90% number above fall into the latter category. So, when I hear about someone tinkering with their 401k or IRA all the time I think, “Why?” and then I ask “Would it help to tell them to stop?”
Why People Do It
I don’t have any scientific evidence, only years of experience with people. Here’s the complete list I can imagine:
– Natural worrier.
– Concerned they won’t reach retirement.
– Anxious to get every last penny out of investments.
– Intensely interested in investing.
– Secretly always wanted to be a day trader.
I can’t think of any others (fill in my blanks in the comments below).
Would It Help To Tell Them To Stop?
I think the answer to this question largely depends on how the individual answers the question “Why People Do It”.
Natural Worrier
I could tell this person all day that he isn’t helping himself, but the only method that actually has worked for me in the past is DATA. If I explain how funds in a 401k plan work, it’s easy to see how much damage you’re doing to your retirement.
First, a 401k plan is a professionally managed investment. This doesn’t guarantee success, but it does mean there are people who work with money all day managing the funds.
Second, each investment is a collection of stocks that largely move with the market. Do you really think you can beat the market? According to a New York Times article, investors spent over $100 billion dollars in 2008 trying to beat the market, and largely lost due to fees. You would have been better off buying and holding low cost index funds.
Besides fees, your ability to time the market isn’t probably as good as you’d hope. According to one of my favorite Kiplinger articles: Can You Time The Market?, there are certainly some good indicators you can track, but the pitfalls are enormous. Going with your “gut” feeling about the market isn’t going to pave the way for a successful retirement.
Concerned They Won’t Reach Retirement
This person needs data, but instead of information on investment returns, they need a financial plan. I’ve found that once this person sees in writing that they’re okay (or not okay) they largely settle down.
Not only can you use the Planwise tool imbedded in our site, but many retirement calculators exist on other (less) popular sites, like Yahoo! Finance, CNNMoney, and MSN Money.
Intensely Interested In Investing
These are some of my favorite people. They want better returns and are willing to go the extra mile to learn more about investments. They’ve dove (dived?) into the 401k because it’s available and easy to understand.
I recommend this person reviews the same data presented above on investment returns (and that his chance of helping his return is going to prove more difficult than just “moving money around”). Then I recommend he take community education classes on investing rather than experiment with hard-won retirement dollars.
Secret Day Trader
I try to present the data above on how hard it is to add to your investment returns first (but this rarely works for the person who is sure they’ll beat the market in their spare time). Once this tactic has failed, I’ll recommend developing a small Roth IRA to use as a “sandbox” to play day trader in. These people are usually placated if they have a “play” account to go along with their professionally managed “backstop” account. How much do I recommend people place in the day trader account? First, we look at what the goal will cost, then I recommend taking money that isn’t crucial to the goal. You don’t want to miss your goal because you thought today was a great time to buy Facebook and it turned out you were wrong…..
It would only make sense that keeping it one place for a longer period of time would gain you the most interest/least fees. But I could see myself being one of those nervous worriers!
I know I was on vacation, but did that mean you didn’t have to do the infamous, “blog post of the week” Does that mean my reward will be worth more if you’ve quit doing it?
I will have to take it off the fridge and frame it and put it in my “safe” room….
Very well written – though we don’t do those in the UK, I suspect it applies to many investments. Would you say ‘don’t fiddle’ and leave it to the different groups to hear you or not?
I just leave mine alone because I’m happy with my allocation. Unless a 401k has a ton of options I don’t see much point between switching constantly. I only have like maybe 10-15 options in my 401k and unless they just keep switching between bonds and stocks I just don’t get it…
Okay, here’s the deal, empirical evidence (in a study by one of the large brokerage houses) has found that active traders fare worse than those who trade less. My advice (however unsolicited) choose and asset allocation and stick with it!!! You could be out of the market of the few biggest days of the year if you’re tinkering too much.
When people are constantly tinkering with their choices, it makes me think the original decision was not very good. I look at my portfolio annually and adjust some investments at that time (if it needs it). I am more apt to adjust my portfolio with new money than mess with my investment choices.
Great info! I think people move their money around because they lack education. If we all gave money the focus it deserves, then we would have far less problems in society. If we educate ourselves about the allocation we need to reach our goals, without fear of risk, then we will be better off.
Amen, Glenis. Well said. Why do we ignore financial and personal health, when they’re the two factors that drive everything we do during a day?
I try to only look at my quarterly statements. It just wasn’t healthy seeing the rise and fall on my Mint tracker, too much temptation to mess with it.
Excellent advice others should follow, Brent. Looking at it quarterly and adjusting is fantastic.
Dear Average,
I liked what you said about I could tell this person all day that he isn’t helping himself, but the only method that actually has worked for me in the past is DATA. If I explain how funds in a 401k plan work, it’s easy to see how much damage you’re doing to your retirement.
Continue this kind of articles because they are very good and useful, congratulations.
My view and experience with 401k plan is not good and after visualizing all the reviews on multiple platforms I have declared that investing in 401K plan is a bad option.
That’s the wrong answer, Retta! 401k plans are great because you get pretax money….something you may not be able to get elsewhere. If your income is right, you might be able to deduct an IRA, but for most people the 401k plan is best.