Like many Americans, Mike Tyson likely has no clue who Dwight Eisenhower was or what he did for America. The former heavyweight champion and the former President/Supreme Allied Commander of Allied Expeditionary Force during World War II share similar outlooks on preparation. In a speech after the war, Eisenhower dusted off an Army aphorism, “Plans are worthless, but planning is everything.” Tyson said it better, “Everyone has a plan until they get punched in the nose.”
From the S&P 500’s record high on Sept. 20, it plummeted almost 20 percent bottoming out on Christmas Eve. While professional traders scrambled out of stock positions and into cash, 401K participants ignored the punch in the face and stayed with their investment strategy. According to Fidelity Investments, 99 percent of all 401K participants at Fidelity, highest since 2011, continued elective deferrals during the last quarter of 2018.
As someone who pulls for the little guy and gal, it’s encouraging when small investors play a poor hand more savvy than the wise guys. As a bonus, stock funds distribute capital gains during December. If a stay-the-course saver reinvested their distributions, they got a nice bump with the best January performance in 30 years.
I laud investors for staying the course, but let’s be realistic. Most people get quarterly statements and likely noticed the decline in early January when markets started to rally. Would participants still be as eager if the market decline had continued for six months or a year? There’s getting punched in the nose, and there’s getting punched in the nose by Mike Tyson.
401K plans are far from perfect. A financial guru of mine, William Bernstein, said the acronym for defined contribution plans (DC) should more likely signify defined chaos. But defined contribution plans have improved since Bernstein noted that almost 20 years. Howard Schultz, a real billionaire, argues Congress doesn’t get things done, but he ignores the Pension Protection Act of 2006, bi-partisan legislation which improved defined contribution plans.
Most 401K plans match employee deferrals. Even relatively small contributions from employers, like 3 percent, mitigate market swoons. Your employer’s match is like an ATM spitting out extra $20s. No one throws those away, but when you don’t contribute to the match, it’s the same thing.
If you are a decade or more from retirement, market declines are inconsequential. Look at the bright side; it’s the opportunity to buy something on sale. Nearing or during retirement, make sure your investments are appropriate for your goals, time horizon, and risk tolerance. You may have stayed invested during The Great Recession, but employer matches and employee deferrals buoyed your 401K. Portfolio withdrawals amplify market declines. Unless you are investing for the next generation, retirees and wannabe retirees should take the least amount of risk possible to reach their goals. Without discipline, the best-laid plans of mice and men go awry.
You can’t always get what you want but Buz Livingston, CFP can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.