Avoid Emotional 401(k) Investing

As we enter the second half of 2012 you may be receiving your 401(k) statement in the next few weeks. When reviewing the statement youll probably look at your total account balance figure and then take a look at performance over the last three months. It is at this point when your willingness to stick to your longer-term 401(k) investment strategy may be put to the test.

Emotions play a big part in the investment decisions of many 401(k) investors. The market crash of 2008 is still very fresh in the minds of investors. Understandably, even what would otherwise be considered typical market fluctuations can prompt some investors to move all assets to cash in the hope of avoiding a market downturn. Another common reaction is to exchange a struggling fund for the currently hot fund option available in the plan.

While these emotion-driven investment decisions may satisfy the short-term need to do something with your investments, reacting can have a negative impact on long-term 401(k) investing goals.

Moving 401(k) assets to more conservative investments can reduce exposure to the volatility of the equity markets, but it is not without its own set of risks. Often when this is done, it is after the market has already declined, securing a lower value for this investment and locking in any possible losses. It also eliminates exposure to these investment types when the market recovers. Many times, emotions will tell these investors to stay in cash until the markets stabilize. Without knowing when this might be, investors can miss a good amount of market upside, waiting for a more stable market before reinvesting.

Common investment advice is to buy low, sell high. Emotion-based investment decisions tend to have investors doing the opposite, which in this case could be selling low and buying high.

Before making any hasty investment decisions based on your most recent 401(k) statement consider your longer-term investment objectives as well as your tolerance for risk. Proper asset allocation is important at every risk level. Also understand that even some of the best funds available may not always be the top performers on your statement when looking at short-term time frames. Short-term dips dont necessarily mean the funds arent a good option for you in your plan. Selling a fund based on this alone could mean missing out once it gets back on track.

An appropriate 401k investment strategy can be a valuable tool over the long-term. This is especially true when it comes to avoiding the emotion-based investment decisions that can come shortly after receiving that quarterly 401(k) statement.

Randy A. Schaller, CFP

Investment Advisor

About Smart401k

Smart401k is a web-based investment advisory service providing unbiased recommendations to help people invest in employer-sponsored retirement plans. Smart401k provides service to nearly 11,000 clients who collectively have more than $2 billion in assets. Plan participants receive personalized, fund-specific investment recommendations and the support of professional investment advisers available to discuss all investment questions. Based in Overland Park, KS, Smart401k is online at www.Smart401k.com .