Investment Advice: The human side to investing in a 401(k) plan

Investment Advice: The human side to investing in a 401(k) plan

February 28th, 2016 by Andy Muldoon in Business Diary

Several years ago, I gave a presentation to a room full of trustees for retirement plans for firemen, policemen and other employees. Unfortunately this was during a similar market meltdown, and the angst in the room was infectious. Surprisingly, given the environment, the informal poll that I took at the conclusion of my talk showed that the trustees (who were incredibly smart and practical individuals) expected returns from their retirement portfolios over the next five years to remain at the pre-crash level.

Andy Muldoon

Andy Muldoon

Photo by Contributed Photo /Times Free Press.

While the types of plans individuals can depend on for retirement have changed, and Social Security seems to be a constant conversation, our emotional IQ (our awareness of emotions' effect on decision-making) generally has not.

The landscape has generally changed from defined benefit retirement plans to plans that put market risk squarely on the shoulders of you and me, the participants (i.e. 401(k) plans). So with headlines like "2015 was the hardest year to make money in 78 years" or "U.S. Stocks Post Worst Annual Losses Since 2008", it's not surprising that our clients are attending more education meetings. In fact, our 401(k) support call center volume has doubled since November.

We all have habits that can get us into trouble financially. According to Richard Thaler's book "Misbehaving," loss aversion is one of the biggies. According to Thaler, losses have about twice the emotional impact of an equivalent gain. The risk to us, as participants, is failing to recognize this tendency and not taking appropriate risk in our retirement plans.

So what messages should participants hear in today's global market environment?

* Continue to save. If you work for an employer who offers a 401(k), continue to make contributions. If you are not participating, reconsider that decision. And remember, if your employer matches your contributions, it's FREE money! If I put $1 in and my employer matches it with 50 cents, that alone is a 50 percent return on my tax deferred investment.

* Time matters. The younger you start the better. The Trust Company founder, Sharon Pryse says, "we have worked with individuals who started saving for retirement in their 20s. By the time their children were in college, they had enough in the 401(k) that they could actually stop saving for a few years while they were paying for their children's college educations." The value of compounding over a long time period is powerful.

* Don't lose sight of your long term investment objective and risk tolerance. Even one of the best investors, Warren Buffett, has Berkshire Hathaway shares that were down over 12 percent last year. However, remember that over the long-term (25 years), the S&P 500 has returned 9.82% annually.

* Don't try to time the market! It is really hard to avoid this, especially when the news is so negative. But you must. Over the past 20 years a $10,000 portfolio invested in the S&P 500 grew to $48,250. If you tried to time the market, selling and then buying, and you missed 15 days each year, instead you would only have $18,840.

* Managing and protecting your retirement savings is important. It is perfectly normal to be concerned, but you should not panic. Don't let your emotional IQ get the best of you.

Andy Muldoon is a senior vice president of The Trust Company in Chattanooga and may be reached at or (423) 308-6834.

Getting Started/Comments Policy

Getting started

  1. 1. If you frequently comment on news websites then you may already have a Disqus account. If so, click the "Login" button at the top right of the comment widget and choose whether you'd rather log in with Facebook, Twitter, Google, or a Disqus account.
  2. 2. If you've forgotten your password, Disqus will email you a link that will allow you to create a new one. Easy!
  3. 3. If you're not a member yet, Disqus will go ahead and register you. It's seamless and takes about 10 seconds.
  4. 4. To register, either go through the login process or just click in the box that says "join the discussion," type your comment, and either choose a social media platform to log you in or create a Disqus account with your email address.
  5. 5. If you use Twitter, Facebook or Google to log in, you will need to stay logged into that platform in order to comment. If you create a Disqus account instead, you'll need to remember your Disqus password. Either way, you can change your display name if you'd rather not show off your real name.
  6. 6. Don't be a huge jerk or do anything illegal, and you'll be fine.

Chattanooga Times Free Press Comments Policy

The Chattanooga Times Free Press web sites include interactive areas in which users can express opinions and share ideas and information. We cannot and do not monitor all of the material submitted to the website. Additionally, we do not control, and are not responsible for, content submitted by users. By using the web sites, you may be exposed to content that you may find offensive, indecent, inaccurate, misleading, or otherwise objectionable. You agree that you must evaluate, and bear all risks associated with, the use of the Times Free Press web sites and any content on the Times Free Press web sites, including, but not limited to, whether you should rely on such content. Notwithstanding the foregoing, you acknowledge that we shall have the right (but not the obligation) to review any content that you have submitted to the Times Free Press, and to reject, delete, disable, or remove any content that we determine, in our sole discretion, (a) does not comply with the terms and conditions of this agreement; (b) might violate any law, infringe upon the rights of third parties, or subject us to liability for any reason; or (c) might adversely affect our public image, reputation or goodwill. Moreover, we reserve the right to reject, delete, disable, or remove any content at any time, for the reasons set forth above, for any other reason, or for no reason. If you believe that any content on any of the Times Free Press websites infringes upon any copyrights that you own, please contact us pursuant to the procedures outlined in the Digital Millennium Copyright Act (Title 17 U.S.C. § 512) at the following address:

Copyright Agent
The Chattanooga Times Free Press
400 East 11th Street
Chattanooga, TN 37403
Phone: 423-757-6315