Average retirement account balances are down, but there’s a silver lining for savers

The first quarter of 2022 has not been kind to retired investors. The reference S&P500 the index lost about 5% of its value while the tech-heavy index Nasdaq 100 fell more than 9%. If your retirement account holds broad market funds, you’ve felt the sting of this downturn.

A recent study from the financial company Fidelity confirms that many retirement savers are in the same boat. The analysis reveals that average IRA balances in the first quarter fell about 6% to $127,100 from the previous quarter. Average first-quarter 401(k) balances fell 7% from the fourth quarter, reaching $121,700.

Image source: Getty Images.

The good news: down but not out

Retirement savers lost wealth in the first quarter, which is never a good thing. But here’s the silver lining: the balance declines were in line with market performance. This indicates that savers are largely staying the course with their retirement plans. Balances have fallen because the market is down, not because savers have sold their funds or stopped investing.

Stable asset allocation

The study also reports that only 5.6% of 401(k) savers changed their asset allocation. This compares to 5.3% in the previous quarter.

Asset allocation is the composition of your investments in different asset classes like stocks and bonds. Your asset allocation strongly influences your risk exposure. For example, a portfolio of 90% stocks and 10% bonds would rise and fall closely with the stock market. In comparison, a mix of 50% stocks and 50% bonds would be much more stable.

The low number of asset allocation shifts meant that savers kept their cool during these market declines in the first quarter. Widespread allocation changes would signal the opposite – that savers panicked. This often takes the form of less equity exposure as investors sell to cut their losses.

Arguments in favor of staying the course

^NDX Chart

Data by Y-Charts.

Unfortunately for savers, the difficult market continued beyond the first quarter. As of this writing, the S&P 500 is down more than 13% for the year and the Nasdaq 100 is down 23%.

Even in double-digit declines, most retirement savers probably benefit from doing nothing. Keeping your portfolio and allowances intact has two benefits. First, maintaining your stock holdings prepares you for gains when the market recovers. Second, continuing to invest in stocks at lower prices makes your stock count effectively.

Selling now, on the other hand, triggers events that can reduce your long-term returns. For starters, liquidating in a bear market generates less value. And switching to safer instruments like cash or treasury bills limits your upside potential later on, as these won’t appreciate when the market recovers.

You will also face the problem of deciding when to invest in stocks again. Do it early and you could see unrealized losses after the fact. Do it late and the stock price will be high – probably much higher than when you sold. It’s a lose-lose situation.

Keep Calm and carry on

Turbulent markets happen and they are always difficult to manage. Chances are you kept your cool in the first trimester of this year. As this market unfolds, continue to channel that calm.

Remember, the stock market has always recovered from downturns – and come out stronger on the other side. Keep a cool head and your 401(k) balance can do the same.