The era of the do-it-yourself investor is officially dead.
We had signs before the economic crash that distressing numbers of workers were screwing up their retirement savings. They overdosed on company stock, failed to save enough to get company matches, cashed out when they changed jobs or took too much -- or too little -- risk.
Since the stock market cratered, though, we've seen an epidemic of panicked behavior that shows how unprepared people are to manage their retirement funds. Consider:
- The overall 401k savings rate is dropping, according to Hewitt Associates data, and AARP said 20% of older workers have stopped contributing.
- The number of workers prematurely tapping their funds also grew last year, Hewitt said. More than 6% of employees pulled money from their 401k plans in 2008, up from 5.4% in 2007.
- Distressingly, much of that increase came in the form of hardship withdrawals rather than loans, Hewitt said. Hardship withdrawals trigger taxes and can restrict contributions; furthermore, every $1,000 withdrawn can cost you $10,000 or more in lost future retirement income.
- Workers have been making more knee-jerk trades -- fleeing equities the day after a market downturn, for example. In October 2008 alone, the percentage of 401k balances being traded nearly tripled from the historical average, Hewitt said.
I see it in reader e-mails as well: the near retirees who had the vast majority of their money in stocks, the strapped families raiding their individual retirement accounts to pay off credit cards, the recent college graduates who can't force themselves to invest in anything but their 401k cash accounts.
Worse, many are so traumatized by the market's sickening fall from its October 2007 highs that they refuse to get back in, and instead have watched the gains that have marked much of 2009 from the sidelines.
Retirement without a netWhat's clear is that too many people don't understand the basics of investing, the relationship between risk and return, the necessity of diversification or the huge consequences of squandering your retirement money.
They don't have a real plan or anyone to talk them off the ledge when they're about to do something stupid.
Those who have run-of-the-mill investment advisers don't necessarily get it right either. Many of those who call themselves "financial advisers" or "financial planners" are just salespeople in disguise, with no comprehensive financial-planning training or even an obligation to put their clients' interests ahead of their own.
Instead of educating their clients and protecting them from irrational decisions, these vendors pushed products in the boom times and stopped returning calls when the market cratered.
By the way, if you need a quick stress test, I'd say you should consider firing your adviser if he or she:
- Encouraged you to invest in stocks or stock mutual funds using money that you would need to tap within the next five to 10 years.
- Told you (or implied) that if you hold stocks long enough, the risk disappears.
- Told you (or implied) that you didn't need bonds and cash in your portfolio in addition to stocks or stock mutual funds.
- Told you (or implied) that moving to an all-cash position was the right move during the downturn, regardless of your economic circumstances or goals.
Before you actually give someone the ax, you should get a second opinion, preferably from a fee-only financial planner with comprehensive training.