Diversified Asset Allocation Rewards Investors

Investors who maintain a diversified asset-allocation strategy, and do not pull out of equities or make sudden contribution reductions, during even the most volatile market activity are rewarded when the equity markets rebound.

This was the finding of Fidelity Investments’ second quarter 2011 review of 401 (k) accounts.

To understand the impact of making investment decisions based on market volatility, such as moving assets out of equities or stopping contributions, Fidelity analyzed participant actions during the market decline of 2008-2009 through the second quarter of this year. The results reinforced the value of a long-term investment approach. 

For participants who changed their equity allocations to 0% between October 1, 2008, and March 31, 2009, the lowest months of the market downturn, and maintained this allocation through June 30 of this year, the cost to their account balance was significant. These participants experienced an average increase in account balance of only 2% through June 30.

Participants who dropped to 0% equity, but then returned to some level of equity allocation after that market decline, saw an average account balance increase of 25%, a sharp contrast to those who stayed with an asset allocation strategy inclusive of equities—these participants realized an average account balance increase of 50% during the same period.

Fidelity also examined participants who stopped contributing to their 401(k) during the same market decline of 2008-2009. These participants experienced an average increase in their account balances of 26% through the end of the second quarter, compared to 64% for participants who continued making regular contributions. 

Analysis of second quarter data reinforced how many participants understood the importance of ongoing contributions and proper asset allocation. In fact, the average annual participant 401(k) contribution was $5,790 at the end of the quarter, up 11% from the same quarter five years prior.

More participants also increased their contribution rates than decreased them (6.1% vs. 2.7% respectively), a positive trend for nine consecutive quarters. Additionally, the Fidelity average 401(k) balance of $72,700 was up 19% over five years.