A recent study by Hewitt Associates found that the market downturns have resulted in a reduction in equity exposure in 401(k) plans, from around two-thirds at the end of 2007, to 53 percent just over half, this past June. That's a huge dropoff, driven primarily by investors selling off stocks and heading for safer returns in the fixed-income markets.
There's an undeniable logic to that strategy, but if you take a step back, you see it flies in the face of conventional investment wisdom. For one thing, selling stocks when the market is falling is a form of market timing, which almost everyone thinks is a bad idea. For another, financial advisors spend an awful lot of time studying and creating-asset allocation strategies, designed to help their clients meet their financial goals over the long haul. When people start loading up on bonds because they're afraid stocks will continue declining, they throw all that asset-allocation planning out the window.
Especially in 401(k)s, which are long-term plans, it's vital to stick to your asset allocation. It's not easy to tell someone who's lost 40 percent of his retirement funds that he or she needs to stay in this stock market that has been so brutalizing. But now that the market has begun to rebound, it's starting to make some sense.
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