The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

The Pain of Discipline vs. The Pain of Regret

February 2010

“We must all suffer from one of two pains: The pain of discipline or the pain of regret. The difference is discipline weighs ounces while regret weighs tons.”
                                                                                                      -- Jim Rohn

Recently a participant in a 401(k) plan for which we serve as the fiduciary advisor called me with some concerns.

“I’m just a little worried because the market seems to be headed down again,” she said. “Do you think I should change to a more conservative strategy?”

I asked the woman whether there had recently been any major changes in her life that would warrant a change in strategies. She assured me there had not – just that she had concerns about the market volatility. After I spent some time reassuring her that market volatility was an unpleasant, but unavoidable, part of equity investing, she finally calmed down and agreed to stay the course.

“You’re right,” she said. “Thank you so much. I just wish I had listened to you last year. I panicked and got out for a few months, but I won’t make that mistake again.”

As I hung up the phone, her last comment kept nagging at me. When had she gotten out? I wondered. And what was the impact on her portfolio?

After some brief research into the plan’s monthly statements, my worst fears were confirmed. The participant got out of the market on … wait for it … March 9, 2009 … the absolute bottom of the bear market. She then got back in about two months later on May 11.

The market has gained quite a bit since May 11, so it can be tempting to think she has done just fine even though she missed the first two months of an historic rally.

But when we consider what she actually missed in those two months we see the real damage done: In missing the first two months of the recovery, this participant missed out on a gain of 23.83%! And this was in a balanced portfolio of 60% stocks / 40% bonds; had she been more heavily invested in equities the opportunity cost would have been much worse.

In hard dollars, this not-hypothetical 401(k) participant’s $200k portfolio missed out on $47,660 in gains that were there for the taking. And with the loss of compounding on that amount over the next ten years (when she will reach retirement age), her momentary lack of discipline could end up costing her roughly $102,000 (assuming a hypothetical return of 8% for her portfolio).

Clearly, as in this case, we can’t always save participants from themselves; ultimately they make their own decisions about what to do with their money. Still, as fiduciaries, we must constantly strive to help participants avoid critical mistakes like this any way we can. We must continuously remind participants that saving for retirement is a long-term endeavor. We must help them avoid the short-term “noise” and stay invested in a well-diversified, low-cost portfolio.

If we don’t then they (and we) may face the long-term pain of regret that is far worse than the short-term pain of discipline.

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