After an incredibly smooth 2017, the U.S. markets have experienced headline-grabbing volatility early in 2018. Steep market free falls give rise to concerns that participants will exit the market on a dip and fail to re-enter until after the market has recovered. In other words, historically, participants have sold at the wrong time and bought at the wrong time.
Data from the February market volatility suggests that retirement plan participants may be improving their response to volatility. This Pensions&Investments article notes that although trading activity reflected significant outflows from equities when the Dow Jones industrial average fell 1,175 points on February 5th, a significant amount of that money moved into balanced funds and target date funds. This represents a change from the past, when 80% of the money would go to cash and 20% would go to bond funds.
The article suggests two primary causes for the improved response: (1) the investment in actively managed funds (target date funds); and (2) continuing education about long-term investing. Those are encouraging developments. Active management is intended to promote greater discipline and more consistent market exposure. Yet participants need to receive education in order to behave in the intended manner. We have much work to do, but this data is encouraging.
“Keep calm and carry on”, as the article states.