Don’t Look at Your 401(k) Plan Statement

There’s a lot of advice on the Internet about how to deal with your 401(k) plan. Most of it is downright wrong.

Here’s what the securities industry, your employer and the advisor to the plan won’t tell you.

Most investment choices are terrible

While there have been some recent improvements, most plans have investment choices geared to enrich mutual fund families, your advisor and other service providers. Note that participants are not on this list.

Here are some simple rules for making the best of a bad selection:

1. If the options include Target Date Retirement Funds, and the fund is otherwise suitable for you, pick the retirement fund with a date closest to the projected date of your retirement, with the lowest management fee (called the “expense ratio”).

2. Otherwise, try to find index funds. Consider an index fund that tracks the U.S. stock market, with a benchmark index like the Wilshire 5000, another one that tracks an international benchmark index, like the MSCI EAFE index, and a third one that tracks a domestic bond index, like Bloomberg Barclays U.S. 1–5 Year Government/Credit Bond Index.

Avoid all actively managed mutual funds, if possible. If a fund doesn’t have “index” as part of its name, it’s probably actively managed.

If you want more details, check out this blog post I wrote in 2011. The advice is still valid today.

Don’t look at your statement

Here’s what I don’t understand. Assume you are 40 years old. You won’t be accessing your 401(k) funds for more than 19 years. Why do you care what happens to your account today, tomorrow or next year? You’re in this for the long term.

Here’s some valuable advice to maximize returns. It’s easy to articulate but difficult to follow. Other than rebalancing every year or so (which is not necessary if you own a target date retirement fund, because those funds automatically rebalance), ignore your account statements.

That’s right. Pay no attention to them. Also, ignore as much financial news as you can. Here’s why.

On almost half the trading days each year, you’ll find the market will be down. Why aggravate yourself? By checking your statement regularly, you will be tempted to “do something” in response to the short-term news.

The data clearly shows that investors who “buy and hold,” rather than bouncing in and out of the market, achieve higher returns. An article on Investopedia summarized this data as follows: The reality is buy-and-hold still works, even for those who held passive portfolios in the Great Recession. There is statistical proof that a buy-and-hold strategy is a good long-term bet, and the data for this holds up going back for at least as long as investors have had mutual funds.

As I explain in this article: In addition to having higher expected returns, this “do nothing” approach to investing has the collateral benefit of reducing stress and anxiety while freeing up your time for activities that give you genuine pleasure.

Resource of the Week

Check out this insightful blog by Isaac Presley on the website of The Cordant Blog. It explains why checking your portfolio less frequently can increase your returns.

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