Please hold on to the bar. That’s sound advice when seated in an amusement park thrill ride. But a recent blog entry suggests that the maxim is applicable to how a plan fiduciary approaches how participants invest their funds amid the vagaries of market volatility.
The rises and falls in the market can evoke a variety of emotions and responses among investors, including plan participants. In “A Fiduciary Must Confront the Fears and Fads of Market Cycles,” FiduciaryNews’ Christopher Carosa notes that the emotions that market swings can evoke stand in marked contrast to the mentality upon which retirement plans are premised, Carosa observes. “[Participants’] goal is usually long-term — saving for retirement,” writes Carosa, but market volatility can thwart that by creating fear during downturns. “Right at the moment when [participants] are poised to do the best for themselves, they take their eye off the ball,” Carosa says. And he cites The Portfolio Group, LLC founder Jonathan Seif, who said of such behavior, “They often get nervous and can even become too conservative, rather than taking a long-term outlook and maintaining an allocation that is appropriate.”
But the pendulum always swings, and inevitably the bear is replaced by a bull. And when that happens, Carosa writes, “investors are quickly able to shift from pessimism to optimism and the drop of the bull market bell.” And, says Seif, that can cause them to “forget about volatility in the past and increase their risk exposure in an effort to maximize their returns.”
Fiduciaries, Carosa argues, must understand these phenomena. “It’s critical a fiduciary become fully aware of the motivations that can lead investors astray,” he writes. “Markets are not rational and neither are those who invest in markets,” says Carosa. “A good fiduciary must keep a level head and know when emotions drive investors,” he says, adding, “After all, if they’re not careful, emotion will drive investors right off the cliff.”