Even as Meme Stocks Surge, Retirement Savers Stay Vanilla

(Associated Press) It might seem like everyone is having a wild time shooting for the stars with GameStop and other meme stocks.

But just as day-to-day life for most of us is more mundane than the highlights friends post on social media, the majority of retirement savers are sticking to plain vanilla plans. And they’re doing fine for it.

Consider the 4.7 million accounts that Vanguard keeps records for in 401(k) and similar plans. Most of them did pretty much nothing last year, other than continuing to send a chunk of their paychecks into their savings. Only 10% made a trade at all in their account during the year.

That’s up from 7% a year earlier, as the pandemic roiled investments and triggered the fastest bear market in history. But 90% of those retirement savers not moving their money from one investment to another stands in sharp contrast to the frenzy surrounding GameStop’s stock, which an army of traders sent surging by 1,625% in January.

More recently, stocks like AMC Entertainment have had days where they’ve nearly doubled, as a new generation of hyper-online traders rally together on social media to champion the same stocks.

So, what did that boring lack of action get the majority of retirement savers? Record heights.

At Vanguard, the average account balance rose 20% last year to $129,157 as the S&P 500 rebounded from its early-year plunge to rally. Over the longer term, the average balance is up 65% from 2011.

The median balance rose even more strongly: up 30% last year to $33,472. Median means half of all the savers in Vanguard’s survey had balances bigger than that, while half had less.

Savers have been getting less active in trading for years in Vanguard’s survey. In 2004, 20% of accounts were making trades, falling to 7% in 2019.

This slowed-down approach is what many experts advise. It can be thrilling to trade hot stocks — who wouldn’t want to make 85% in a day, like Clover Health Investments did earlier this month? But research suggests that frequent trading leads to lower returns for most investors.

In Taiwan, where researchers led by Brad Barber of the University of California, Davis were able to measure the activity of speculative day-traders over a 15-year period, less than 1% were able to predictably and reliably get good enough returns to make up for the fees they paid.

And now that meme stocks have captured the national attention, everyone from the chair of the Securities and Exchange Commission to heads of investment firms are warning investors to consider the risks of fast trading.

Besides making relatively few trades last year, retirement savers also stuck with investment choices that tilt closer to the “boring” end of the scale.

The majority of savers in Vanguard’s survey, 54%, had all their money in a single mutual fund tied to the year they hoped to retire. These target-date retirement funds automatically take care of how to divvy up investments. They emphasize stocks when retirement is far away and toward more bonds and safer investments when it’s closer on the horizon.

Among other encouraging signs from Vanguard’s survey: Few retirement savers had all their money in either stocks or bonds, a sign of taking too much risk or not enough, at 8%. Savers also set aside an average of 7.2% of their pay into their retirement account, up slightly from 7.1% a year earlier.

Much of that is by design. Employers in recent years have not only been automatically enrolling their workers into 401(k) plans, they’re also often defaulting to target-date funds and automatically increasing some workers’ contribution rates.

It’s crucial that people get it right. Roughly half of the country is in danger of not being able to maintain their standard of living in retirement, even if they work to 65 and annuitize all their assets, according to the Center for Retirement Research at Boston College.