The Color of Money: When the stock market is crazy, invest like a millionaire

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WASHINGTON

I finally looked. After months of avoiding swiping through the app for my 401(k) retirement account, I opened it and looked at my balance.

It wasn’t horrible.

Periodically, it’s fine to look at how your retirement account is doing. As of this week, my account was down 9.4% compared to a year ago. But when I looked at the three-year return, it was good, up 12.4%. Looking back over the last several years put today’s stock market gyrations in perspective.

Sure, I’m down from the high of 2021, but overall, my retirement investment plan has done exceptionally well over the years.

I know to stay the course, to avoid worrying about short-term losses because retirement investing is a long-term game. Yet it’s hard not to become overwrought when your retirement funds are taking a hit. Once the stock market began its descent earlier this year, I just stopped looking at my account. It’s not that I would have made any changes. I knew I would be extremely agitated if I saw how much my balance had dropped.

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But this is the journey you take when investing for your retirement. You have an investment plan, you make your contributions paycheck after paycheck, and you don’t make a rash move when the market becomes volatile.

That’s what 401(k) millionaires do, according to Fidelity Investments, which analyzes the saving behaviors and account balances for more than 35 million IRA, 401(k), and 403(b) retirement accounts.

When the stock market is crazy, follow the lead of 401(k) millionaires.

“We point to the 401(k) millionaire as an example of taking a long-term approach and staying the course,” said Mike Shamrell, vice president for thought leadership for Fidelity. “We’ve found they take full advantage of the company match. They are fairly aggressive savers, and they’re not afraid of equities.”

Percentage-wise, the millionaire club is relatively small, under 2% in plans managed by Fidelity, one of the largest managers of workplace plans. Still, their saving habits and tenacity in turbulent markets are inspirational.

Before the pandemic and the economic havoc it brought about — inflation, rising interest rates, supply chain issues — the number of millionaires was increasing significantly among government workers and private-sector employees.

The number of 401(k) millionaires in the fourth quarter of 2021 jumped 32% compared with a year earlier. That upward trend ended in the first quarter of 2022, with an 8% decline in the number of workers in this elite club from a year earlier. For the second quarter, the number of 401(k) millionaires dropped by nearly 28% compared with the first quarter of this year.

The number of millionaires investing in the Thrift Savings Plan had been surging, too. But their numbers have also declined, according to the Federal Retirement Thrift Investment Board. As of June 30, there were 28% fewer TSP millionaires compared with the previous quarter.

Many were knocked out of the millionaire’s club in the past six months.

But these long-timers, who, on average, have been investing for about 28 years, stick with the stock market through rough periods — the dot-com bust, the 9/11 terrorist attacks, the flash crash of 2010 and the Great Recession.

They aren’t discouraged by stock market drops. And this year, the downturn has been significant.

The average 401(k) balance dropped to $103,800 in the second quarter, down 20% from a year ago.

The average individual retirement account (IRA) balance was $110,800, down 17.9%. The average 403(b) account balance decreased to $93,300, a decline of 18% year-over-year.

What does staying the course look like?

Fidelity looked at three different savings strategies 401(k) investors could have taken during the Great Recession. Each hypothetical investor started with $400,000 in October 2007 in a portfolio with a mix of 70% stocks and 30% bonds.

In this hypothetical example, it’s September 2008, and the U.S. stock market dropped by 20% from its prior high, which is commonly defined as a bear market. The first two investors panicked when their accounts dropped to $352,000.

The first investor jumped out of the market, going to all cash, and stopped making contributions. The second one also moved to cash but kept contributing to a workplace plan. The third investor kept the money invested and continued to contribute. The latter two investors each had $15,000 going into their 401(k) annually, including employer matching contributions.

By February 2012, the investor who cashed out and stopped contributing had $353,400. The worker who went to cash at least returned to making 401(k) contributions and had $404,709. The third investor had $524,600 by sticking to the original investment mix.

When you’re a 401(k) millionaire, you know past performance doesn’t guarantee future results. Yet history has shown that bad markets eventually gave way to better returns.

Historically, staying the course puts you in the position to benefit from the recovery, Shamrell said.

“They have been through a lot of pretty significant economic events,” he said. “They are a group that you can point to as good examples of understanding that retirement savings is a long-term approach and not to react to any sort of short-term market.”

During the month of July, the S&P 500 increased by 9.1%, enjoying its best month since 2020,

Fidelity pointed out in its retirement report.

The 401(k) millionaire understands staying the course isn’t a trite expression but a wise move.

Readers can write to Michelle Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071. Her email address is michelle.singletary@washpost.com. Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible.