If you follow the Business page or even the news in general, you know we have been in the midst of a downturn in the stock market. Over the weekend, I thought about my email, phone and office traffic over the last 2-3 weeks while the market has been going crazy and corrected down around 10%.
My conclusion? I hadn't had a single conversation with an employee who was freaking out about the value of their 401k. I checked mine, and it was down about 8% overall for the three-week period ending last Friday.
Is there any other area where employees take a 8% decrease and aren't hitting you hard to determine what's going on or how to get it back? Could it be our employees are a bunch of savvy long-term investors, with the required understanding of the long-term horizon and the confidence that comes with that approach?
Or, are they just not watching their accounts? And if they aren't watching their accounts and the related news during market corrections, is that the best investment approach they could have? The Frontal Cortex recently rehashed some 1980's Harvard Research that suggests less news equals less action, which produces better results. From the summary of the research:
"In the late 1980's, the Harvard psychologist Paul Andreassen conducted a simple experiment on MIT business students. First, he let the students select a portfolio of stock investments. Then he divided the students into two groups. The first group could only see the changes in the prices of their stocks. They had no idea why the share prices rose or fall, and had to make their trading decisions based on an extremely limited amount of data. In contrast, the second group was given access to a steady stream of financial information. This was supposed to be equivalent to watching CNBC, reading The Wall Street Journal and listening to experts analyze the latest market trends.
So which group did better? To Andreassen's surprise, the group with less information ended up earning significantly more money than the well-informed group. Being exposed to extra news was distracting. Instead of focusing on the important variables - the actual movement of share prices - the "high-information" students would become fixated on the latest rumors and insider gossip. (Herbert Simon said it best: "A wealth of information creates a poverty of attention.") As a result, these students engaged in far more buying and selling than the "low-information" group. They were confident that all their knowledge allowed them to anticipate the market. But they were wrong. Too much information can induce a state of ignorance."
Of course, this research probably assumes that the participants held valid investments with the proper amount of diversification, etc, which is not always the case. Additionally, employees obviously have to be participating in their 401ks for the "buy and hold" approach to work as a long term investment strategy.
So, get your employees to participate in the 401k, educate on indexing and diversification, then bask in the knowledge that once properly invested, not following the news in downturns is probably a good thing.
Gecko would be proud....