Some workers who invest in stocks through their employers’ 401k plans proved to be fickle investors this summer. In August—after sharp stock market declines in July—a near record amount of 401k money was yanked from the stock market, says Hewitt Associates LLC, a human resources consulting firm. Hewitt’s index of 401k investments showed that plan participants shifted $765 million from U.S.stocks during the month. It said that was the third-largest one-month shift of 401k money out of stocks. The record remains September 2001, when employees fled the markets after the Sept. 11 terrorist attacks. “Such a clear cut direction seldom occurs,” the company said.
The money went into bond, money market, and stable value funds, it said. Plan participants also jointly pulled $165 million from international stock investments in August, the second largest withdrawal from that sector. Employees apparently were reacting to the market volatility that sent the Dow Jones Industrial Average down 586 points during the week ended July 27. Additional declines occurred in early August.
However, those who fled may have not had the best timing: The market began climbing in the second week of September and continued for five straight weeks, bringing the Dow and several other stock indexes to new record highs. Moving out of stocks just before that upswing effectively locked those employees into guaranteed losses from the levels their accounts had reached earlier in the year.
Several studies have shown that investors who move money in reaction to market swings end up earning less than average. Investors who can ride out temporary declines do better in the long run.
