| Sargent & Lundy Savings Investment Plan |
| MARKET TIMERS |
| The following excerpts are from an article in the Monday,
August 10, 1998 "Wall Street Journal". The opinions of the author,
Pui-Wing Tam, may or may not reflect those of the SIP Committee.
Individual investors have been told time and again that they shouldn't throw their retirement savings around in an effort to time the market. But a new study from Hewitt Associates suggests that a lot of folks still haven't gotten the message. On Tuesday, when stock prices plunged and the Dow Jones Industrial Average fell nearly 300 points, people with company-sponsored 401(k) retirement savings plans apparently hit the phones. Trading activity among a sample of 1.4 million 401(k) participants jumped to twice the normal level, according to the Hewitt study, with money mainly flowing out of stock funds and into fixed-income funds. It wasn't an aberration. From July 27 to 31, the Hewitt study found, trading activity doubled - and sometimes even tripled - on days when the market fell more than 100 points. The investors tracked in the study, who represent assets totaling $62 billion, routinely shifted money into bond and money-market funds on days when stock prices fell and back into stock funds on days the market rose. In October, when the market nose-dived following turmoil in Asian markets, the reaction was even bigger. Trading by 401(k) participants jumped to four times its normal level, the Hewitt study says. By jumping in and out of the market, investors risk being on the sidelines when stock prices rise, having to pay higher prices when they buy, and locking in losses when prices fall. 'The bottom line is that groups of market timers are hurting themselves," says Ricardo Reinking, a 401(k) investment consultant at the Lincolnshire, Ill., consulting firm. Louis Harvey, president of Dalbar Inc., Boston, a financial-services research firm, says such "behavior is counterintuitive." Moreover, he says that in 80% of the instances that investors have attempted to time the market, the effort has backfired. But while most financial advisers repeatedly counsel individual investors against market timing, some say it can be particularly ill-advised in a retirement account that you won't have to tap for 10, 15 or even 20 or more years. "In a retirement plan, you should have your longest-time horizon in view," says John Scarborough, a fee-only financial adviser in San Francisco. "You definitely shouldn't be trading around." Investors may be tempted to switch in and out of stock funds in a tax-favored retirement account because they can do so without having to worry about tax consequences. In contrast, switching money around in a regular mutual-fund account can trigger an immediate tax liability. Financial advisers say, however, that investors shouldn't let this tax consideration get the better of them. A 401(k) plan is designed for retirement and should consequently be left alone until then, they say. So, what course of action should 401(k) participants follow in such uncertain times? "When the market is moving around so much, I'm a great proponent of doing nothing," says Scott Greenbaum, a fee-only financial adviser in Purchase, N.Y. Because 401(k) participants are saving for retirement, investors should stick by their asset allocation - that is, the proportion of stock compared with bonds and cash in their portfolios - and try not to respond to drastic market movements, he says. The only time investors should shift their assets around in their 401(k) plan is if their asset allocations have gone drastically out of whack with their original plans, Mr. Greenbaum says. In that case, wait until the dust settles and then gradually move to rebalance your portfolio, he suggests. "The hardest thing to do is to do nothing in times like this," notes Mr. Greenbaum. "But if you have a proper asset allocation for your own situation, then the market volatility shouldn't cause you to change that." |
This page updated on 8/17/98