There's something to be said for sticking your head in the sand and ignoring reality. (Photo: Shutterstock)
The 2008-2009 market downturn was the worst fall in the memory of most investors. When they opened their 401(k) statements in the first quarter of 2009, many investors panicked. They committed the second-worst sin an investor can commit: They sold low. (The worst sin is buying high.)
Are we headed for a repetition of this history? We are about to find out (see “4th Quarter Fallout: Mistakes 401k Participant Might Make After Reading Their Latest Statement,” FiduciaryNews.com, January 29, 2019).
This might be hard to believe, but if we are to avoid the problems of panic, we need to learn the lessons of 2008-2009.
Ten years ago, when participants opened their statements, they were shocked. Their tidy nest eggs had lost nearly half their worth in roughly a year. In letting their emotion take control, they instinctively sold in the first quarter of 2009 – just as the market was reaching its lowest point.
What was the consequence of succumbing to fear? They lost out on participating in the gigantic bull market bounce that began in March of 2009. As a result, it took them longer to recover their losses.
Indeed, some may never have recovered.
What folks avoided this mistake? The ones that didn't open their statements.
They saw the headlines. They knew what was coming. Rather than confronting reality, they instead decided to “go ostrich.” They chose to bury their heads in the sand. Sure, they received their statements, but they never opened them.
That may sound like escapism. Yet, it might have been the correct decision. By ignoring reality, they never confirmed their worst fears. As a result, they didn't experience that same raw emotion that caused their peers to sell in panic.
They kept their retirement funds in the market and rode the eventual rebound to greater heights than they ever experienced.
It's probably not ideal to ignore reality. It's better to prepare for it. And by “prepare for it” I mean preparing for multiple scenarios. You don't have to know which scenario will happen. All you need to know is what to do when it does.
Think of it as if you're a quarterback running the option. You don't know what the defensive end will do. Your coach will teach you, however, what to do given the two different actions that defensive end can take.
In scenario one, the defensive end angles out to contain your ability to run around him, in which case you give the ball to the tailback. In scenario two, the defensive end angles in towards you, in which case you keep the ball yourself and speed around the end.
You don't know which scenario the future will bring, but you know exactly what to do once the future reveals the actual scenario to you. And you act accordingly.
Wouldn't it be great if retirement plan savers were just as prepared for the future as option quarterbacks? And who is there to coach those savers on what to do given any variety of scenarios?
Without financial professionals coaching them, perhaps it's best if retirement savers “go ostrich” this quarter.
READ MORE:
Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.
Your access to unlimited BenefitsPRO content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking benefits news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
