The U.S. stock market has been a roller coaster, but in recent days, the trip has been more like a free fall – many retired investors are panicking.
March 2025 marks the busiest month of 401(k) trading activity since the Covid-19 market crash in October 2020, according to Alight Solutions. Nearly half of the days perform better than normal trading. trigger? A perfect storm of market volatility, high interest rates and political uncertainty that could be associated with President Trump’s latest economic policies.
Facing the red numbers on the screen, many 401(k) participants pulled money out of stocks and were eager to rush towards a safe haven they hoped to be safer. But while it is understandable that the urge to protect nest eggs is understandable, retired savers who follow these jitters may just cause you more damage later on.
According to the latest 401(k) index, the process is clear. Outflows are mainly from large U.S. stock funds and target date retirement funds, often the backbone of long-term portfolios. Meanwhile, the inflows mainly inflows into stable value funds, bond funds and money market funds.
Stable value funds are the biggest winners, with about 40% of transactions flowing in. These funds are only available in retirement plans, which contain high-quality short- to medium-term bonds and have insurance packaging contracts designed to protect principal and accumulated interest. This means that even if the value of the bonds in the fund falls, exit participants can be guaranteed.
Essentially, this is the financial equivalent of crawling under the cover during a thunderstorm. Jania Stout, president of Prime Capital Netirement & Wellness, introduced the assets to CNBC.
Alight analyst Rob Austin told the National Association of Planning Advisors that young investors are new to huge market volatility and may cause higher trading activity. "This is the first time they've seen their 401(k) drop. They pull it out safely. Unfortunately, when the stock has fallen, they've done that now, which is what we usually see. People don't get back into the stock until after the rebound.
It's easy to understand why. After years of steady growth, the recent market shaking can be shocking. The once-looking unreachable retirement accounts suddenly shrink, and the idea of “waiting” can become even more difficult when your future is online.
But in a hurry to be safe, many investors risk making a classic mistake: react emotionally and transfer funds to low-risk fixed-income assets rather than thinking strategically.
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When the market gets tough, the gut’s reaction is simple: get out before the situation worsens. But history is clear, trying to time the risks of the market.
Investors who fled stocks during a downturn missed not only missed their worst days. They also usually miss the best recovery days, with those sudden rebounds making up for losses and adding long-term wealth. And, even if there aren’t a few critical days, there are some that are missing that can even yield to your rewards for decades.
Consider it: If you missed the best 10-day day in the market in the 20 years from January 3, 2005 to December 31, 2024, your returns will be cut in almost half, according to JP Morgan Asset Management data cited by CNBC.
The timing of the market needs to be correct twice: once for sale, once for repurchase. Few professional or amateur investors can achieve consistently.
Stable value funds have their own positions, especially for investors who are close to retirement and cannot afford significant losses. But for anyone over five years, until retirement, taking out too much stock will actually increase the risk that you will run out of it later.
"Don't be fooled by investment risks, don't think about inflation risks," Austin told CNBC. "You may not see your account value drop, but inflation remains high: Are you going to exceed enough to make your portfolio grow?"
Despite stock volatility, it has historically been the best way to surpass inflation and increase wealth over the long term. Giving up growth potential too early may mean smaller retirement income, fewer lifestyle options, and the difficult path ahead.
A popular rule of thumb says you should reduce your age from the 110s to see how much portfolio you should have in stocks. Talk to your financial advisor about the correct asset allocation for your age and financial goals.
This article provides information only and should not be construed as advice. It is without any warranty of any kind.