Monday’s market drop got to some retirement investors, who responded to the volatility by selling large cap stock and target-date funds and stable-value, bond-, and money-market funds.
That followed the tepid US jobs report on Friday that sent stocks tumbling Aug. 5. While most 401(k) participants don’t touch their accounts, the trading volume on Monday was over eight times higher than usual, according to data from plan provider Alight Solutions.
Trading on that day reflected just 0.08 percent of all account balances in the company’s system, but that is still nearly as much as was traded in all of July, at 0.09 percent, the firm stated. And it was the highest level of trading activity since March 2020, when people began reacting to the uncertainty of the emerging Covid-19 pandemic.
On Monday, the trades “almost universally favored a flight to safety,” Alight said in a statement. Sixty percent of the net outflows came from large-cap US equity funds, while 13 percent bled from target-date funds, according to the company’s data. Meanwhile, 61 percent of the money went to stable value, 20 percent to bonds, and 18 percent to money markets.
“Throughout the 25-year history of the Alight Solutions 401(k) Index, we have seen trading activity spike when the market suddenly drops,” said Rob Austin, the company’s head of thought leadership, in an emailed statement from a spokesperson. “Aug. 5 was no exception. Trading activity in 401(k) plans surged to levels not seen since 2020 reaching 8.3 times the average daily volume.”
The company doesn’t have data to show how much the participants who did make trades bought or sold. However, it is more common for those with higher balances to be active in trading their 401(k)s, according to the firm. That appears to be due to being more experienced with investing and potentially more financially savvy, a spokesperson said.
Of course, selling shares of stock funds while the market is down can be ill-advised, as retirement investors can essentially lock in losses and end up taking longer for their account balances to recover. At market close, the S&P 500 was up 1.04% while the Dow Jones Industrial Average had increased 0.76%, despite lagging their high points seen in mid July.
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