The quick answer is more often than checking the oil in your lawn mower (seven years for me – still going strong) and less often than your email. Workers saving in 401k’s are notorious for having a “set it and forget it” strategy. Honestly, we see some accounts where people haven’t done anything for years – sometimes it works out, other times not so much. Meanwhile, other savers can’t seem to let their 401k just be – constantly tinkering with it, which can often be even more harmful than had they just left it. We’re here today to set the record straight on how we approach this, why we believe that, and how it impacts our clients.
Where to start?
Your 401k is a retirement account, not a brokerage account. This means it was purposely built for long term investing. Most plans have built in mechanisms to prevent employees from making frequent changes to their investments, attempts at market timing, and other tactical approaches. For instance, it’s common for plans to limit the number of transactions a participant can submit within a given period, like thirty, sixty, or ninety days. If that limit is exceeded, the plan can place future restrictions on the ability to make any changes and may even charge fees. Why all of these limitations? Great question! In a traditional brokerage account, the account holder is responsible for the cost of trading, commissions, and other fees. In an employer-sponsored plan, the employer and the custodian either foot the bill or pass those fees on to the plan participants, meaning active traders make the plan more expensive for everyone in it. Therefore, many plans employ the restrictions mentioned above to deter excessive trading activities that incur the extra costs.
But what if the market is up (or down)?
We’re constantly getting questions about market pull-backs, inverted yield curves, and the next recession, all while a separate group is asking about the hot market, all-time highs, and fund performance. What to do with people who view the exact same market completely differently? Well, blooom’s philosophy is that the plan we’ve put into place was created to help our clients weather any market environment, given the level of risk they are comfortable with and need to be exposed to in order to reach their long-term goals. We’d prefer to respond rather than react. We likely aren’t going to change things in either an up or down environment because 1) your plan wasn’t created with a short term goal, 2) your blooom advisor doesn’t believe in reacting, and 3) chasing performance typically results in getting in your own way..
Now, we aren’t saying that everything should be ignored… don’t be like that Karen (no Karen’s were harmed in the writing of this post). You change, your goals change, your plan could change; hell your employer could change!
There are plenty of reasons to check your investments and your approach:
- You Change: You’re not a static being – you’ll age (unless you’re our Director of Client Service) and your comfort with risk may change, as will your requirements for income and access to your savings. Your portfolio should become more conservative as you age, but still have equity exposure to allow your investments to grow with inflation (hopefully above) and participate in market growth. Blooom has a built in glidepath that will do this for you on your blooomiversary (it’s a real thing, we just don’t quite yet have our gift guide setup). If you’re attempting to change your risk preference through blooom’s portal every other month, that’s likely a result of attempts to time the market. We encourage you to reach out and chat with our advisors.
- Plan Changes: There are a number of potential changes that can occur, here are a few of the most common – new funds added, others removed, expenses change, institutions change, additional plan features are added, among others. Setting your contributions and then never checking on the account again means you could miss out on some incredible opportunities. We recently saw a large employer make some great changes – among them were three new funds that lowered the average portfolio cost from 0.30% to below 0.10% (varies based on company stock holdings and allocation). Any given year, that may not add up to much or seem like a big deal, but that savings compounded annually means a lot more in their pockets.
- Employer Changes: Earlier in the year, we put out a nice article on what to do with old employer accounts. You have options, and likely, you can benefit from putting a small amount of thought and time into reviewing them. Those options likely include: keeping it in the current account, moving it to a new plan (if you have one AND if they accept rollovers), or moving it to a Rollover IRA. You can withdraw it, sure, but we probably are not going to recommend that (it’s the exception, not the norm). We are here to help with this decision and can lay out your options for you and work through them with you.
- Market Changes: 2009 to 2019 was an unprecedented decade of growth, and during that time, a lot of investors seem to have forgotten that markets move down sometimes (even though the stock market has shown a long term upward bias). Short term volatility isn’t a reason to move all of your investments into a Stable Value fund – because to do this right, you need to sell at the high and buy back in at the low. In other words, you need to be right twice, when being right once is already hard enough. We do advocate for making some changes when necessary though, just not the type that will give your account whiplash because a talking head hits “Sell Sell Sell” and throws a coffee at the camera recording the show.
- Rebalancing & Reallocation: We’ve established that markets move, as a result your portfolio will eventually drift out of the recommended portfolio. We’re here to keep an eye on this for you and have established various tests for your account to make trades only when necessary.
If you’ve made it this far and you’re thinking “Will they please tell me how often I should check my investments?!”, hopefully everything you’ve read so far has made enough sense. So here you go: you should check your investments enough to be familiar with the direction that you’re going, confirm that your account is up-to-date on any plan changes, and that you have adjusted for any life/employment changes that may impact your plan. If you’re losing sleep over weekly or monthly performance you’re probably checking it too often. If you’re wondering why the S&P 500 is up 13% and your globally diversified portfolio that is 20% bonds is only up 7.5%, then you are not familiar enough with the intention of your portfolio
Never forget – this is your account, you’re in charge, even if someone is helping you with it. Advisors, including blooom, are only here to help incorporate their philosophies into your portfolio. There are plenty of items that you can control and plenty others that you can’t. Identifying these early on and taking advantage of the opportunities that you do have will lead to the greatest probability of success. Keep up the great work gang. Final thought: if you have questions or are fretting over your portfolio choices, reach out! After all, that’s what we are here for and we’d love to help however we can.