Are 401(k) investors guilty of market timing?

There was plenty of positive spin coming out of the mutual fund industry last week. The Investment Company Institute reported that 70% of Americans now have a retirement account and Fidelity Investments’ roundup of 2008 trends in 401(k)s focused on the fact that amid recent market tumult 401(k) investors “contributed to their accounts at normal historical levels, took fewer loans than in 2007, improved their asset diversification and continued to decrease company stock holdings.”

Good news? Sure. But it’s far from the whole story. What isn’t getting a whole lot of play right now is that once again individual investors seem to have fallen victim to the urge to market time. In 2008 that amounted to a massive run for cover. Hewitt Associates, a Chicago-based benefits consulting firm reported that 401(k) investors pulled $6.3 billion out of stock and stock funds out of the retirement accounts tracked in its 401(k) index. Much of that money ($5.3 billion) found its way into GIC/Stable Value funds. Both are records since Hewitt began keeping tabs on all matters 401(k) in 2008. The average 401(k) account in the Hewitt universe had 53% invested in stocks/funds at the end of 2008, down from 67% a year earlier. New contributions are also taking a more conservative bent: 57% of new money is being invested in stocks according to Hewitt, compared to 68% a year ago.

Apparently the investing pledge of allegiance-Buy Low, Sell High-is easy to lip sync but hard to live by. And to be sure, this is just the latest chapter in the long saga of how investor’s peripatetic urges can be costly.

There’s no denying it’s hard to stomach today’s market volatility, but when you’re investing for a goal that is a decade or two or three away the smartest move is to ignore today and focus on what really matters.

• Stocks, not bonds are what have the best chance of inflation beating returns. Check out this asset allocation tool to find the right mix of stocks and bonds.
• Rebalance into stocks now. Your contributions buy more shares of stocks today given lower prices. Repeat as needed: the more shares I own today, the more my portfolio value will rise over the long-term when the markets recover.

– Carla Fried