Sysco Professionals: Why Might it be Bad to Check Your 401(k) Balance During a Bull Market?

In the financial world, discipline often outweighs immediate action, especially when it comes to long-term investments such as 401(k) plans. Despite the allure of a bull market, experts advise restraint in frequently checking your 401(k) balance, highlighting the potential behavioral pitfalls that can derail sound investment strategies.

Behavioral economists warn against the habitual nature of seeking instant gratification through the seemingly positive reinforcement of an increasing balance. This habit can inadvertently lead to impulsive and risky financial decisions. Data from brokerage firms indicate that bull markets particularly exacerbate this tendency among savers, increasing their susceptibility to forming an account-checking habit.

Sarah Newcomb, a notable behavioral economist and the founder of Thrive Financial Empowerment Center, emphasizes the psychological risks associated with frequent balance checks. Investors who consistently monitor their accounts experience every market fluctuation, subjecting themselves to an emotional tumult akin to a roller coaster. This emotional instability often culminates in suboptimal decision-making, potentially jeopardizing long-term financial goals.

An analysis of account activity among five million participants in 401(k) plans administered by Vanguard Group revealed intriguing behavior. In 2022, a year when the S&P 500 index experienced an 18.11% decline, 62% of participants checked their account balances. However, during the market upswings of 2019, 2020, and 2021, where the index saw increases of 31.49%, 18.4%, and 28.71% respectively, between 66% and 69% of participants engaged in balance checks.

This phenomenon aligns with what Newcomb identifies as the 'ostrich effect,' where investors prefer to avoid bad news during market downturns. However, the inverse behavior during market highs can prompt actions equally detrimental to an investor’s portfolio. For instance, David Blanchett, head of retirement research at PGIM, the asset-management business of Prudential Financial, points out that investors may be tempted to disproportionately invest in stocks in pursuit of higher returns during these periods. Such a strategy can result in significant overexposure in the event of a market downturn, thereby amplifying potential losses.

Furthermore, observing a growing 401(k) can instill a false sense of financial security for Sysco professionals, potentially leading to increased spending and reduced saving, creating a precarious financial balance, Blanchett adds.

The role of technology, especially mobile devices, in facilitating frequent balance checks cannot be overstated. Vanguard data indicated that savers utilizing mobile devices for checking their 401(k)s did so 25 times on average in 2022, an increase from 20 times the previous year. In contrast, those accessing their accounts via computers remained consistent at 10 times for both years.

Remarkable insights from studies conducted by behavioral economists Shlomo Benartzi and Richard Thaler underscore the inverse relationship between frequent account monitoring and long-term returns. Investors who eschewed regular market monitoring in favor of a long-term view realized considerably higher returns than their more vigilant counterparts.

Interestingly, a high frequency of balance checking doesn’t necessarily correlate with increased trading activity. Vanguard reported that only 6% of participants actively managing their 401(k) investments shifted funds in the last year, a decrease from 8% and 10% in the preceding two years, respectively. Among those investing in diversified target-date funds, a mere 2% engaged in trading.

Joel Dickson, Vanguard's global head of advice methodology, acknowledges the low levels of trading activity, suggesting that frequent account monitoring might be relatively harmless. However, the emotional strain induced by regular exposure to market volatility is undeniable. Historical data from BofA Global Research shows that since 1929, the S&P 500 has registered negative total returns on 46% of the trading days, subjecting daily balance-checkers to frequent negative news. In stark contrast, annual balance inquiries encountered losses only 26% of the time, and over 10-year spans, the probability of loss dropped to just 6%.

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Even amidst a bull market, frequent checks expose investors to more frequent losses, leading to unnecessary stress for Sysco professionals, asserts Blanchett. This stress is particularly potent given that for most people, the distress of loss outweighs the satisfaction of equivalent gains.

Striking a balance in how often one checks their 401(k) is crucial for Sysco professionals. Newcomb advocates for occasional checks, particularly after new contributions, as a form of positive reinforcement for saving. Conversely, Blanchett advises a more restrained approach, suggesting annual reviews, or at most, quarterly checks to assess progress against retirement objectives. Establishing a regular schedule and adhering to it through calendar reminders can foster discipline, prevent reactive decision-making, and promote a healthier, long-term investment mindset.

Another crucial consideration for Sysco employees nearing retirement is the sequence of returns risk, especially pronounced during bull markets. A report by the Stanford Center on Longevity (July 2020) emphasizes that an overexposed portfolio could suffer irrecoverable losses if a market downturn occurs just before or shortly after retirement, significantly affecting the retirement income. This risk underscores the importance of a well-balanced portfolio and a less reactive approach to market highs, safeguarding hard-earned savings from market volatility as one approaches their Sysco retirement phase.