Jack Bogle, the legendary investor and founder of Vanguard, has been saying the same thing over and over again, for years. Diversify the holdings in your 401(k), buy low cost index funds, and don't look at your monthly statements until the end of the year. It's hard to heed this advice in good times, but even harder when the waters get choppy. In case you missed it, the waters are as choppy as a Vitamix right now, and we are in the midst of one of the biggest sell-offs in years. The markets haven't crashed... yet, but the winds of correction are blowing all around us. We haven't felt those blasts in awhile, and younger investors may be feeling them for the first time. But, what's disturbing is the fact that retail investors have been selling stocks and ETFs through their 401(k) accounts this week, trying to bail out before it gets worse.

Any reasonable financial advisor or planner will tell you this is a cardinal sin. Recent history - the last 60 years, will prove it. Market downturns happen, but you have to be able to stomach them if you want to win the long game. Data this week from Alight Solutions, which tracks the 401(k)activity of individual investors, shows that trading activity in 401(k) accounts tripled after Friday's sell-off of over 2% on the S&P 500. On Monday net trading activity was up 12 times the normal. Nearly all trades they tracked were into fixed income investments and out of stocks. In Alight's 401(k) Index, which has been around for 20 years, this has only happened a few times. The last time it happened was in August 2011, after a brutal sell-off.

 

Graph: Alight Solutions

We are not smart or silly enough to predict when this sell-off will end and stocks will resume their normal trajectory. No one is and don't believe anyone who promises otherwise. But remember that your 401(k) is not a video game or 'fun money'. It's your retirement vehicle and your light at the end of the tunnel. If you want to play with stocks or try to time the market, get a brokerage account or learn to trade on our stock simulator. Set up your 401(k) with an asset allocation that is right for you based on your risk appetite and your long-term goals. It's OK to re-balance it occasionally, but if you try to use it to time the market, you may be digging yourself a financial hole that you will never be able to climb out of.

Caleb Silver - Editor in Chief

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