A great number of investors reacted in a very predictable fashion as the Great Recession took hold. They sold their holdings on the way down, in large part because no one could predict how far down would actually be and stopped contributing to their 401(k) plans. Employers, as we have discussed here, suspended their matching contributions for several reasons (no need to spend money where it didn't need to be spent and there was no longer any reason to offer this as an incentive to keep or hire new employees).
Adding to the mad dash to protect dwindling balances, target date funds and bond funds swelled with new contributions. This was, in many instances, akin to stuffing money under the mattress. Not that some these funds did poorly or had mediocre performance, although many did, investors felt protected or at least safe from the chaos and volatility of the open markets. It was a flight to risk-free, or at least, invest-and-forget investments.
Historically, the bad news of a falling stock market lasts about six months. This quick, fall-off-a-cliff drop to the bottom is often followed by a market where investors find innumerable bargains. Over the last decade, unlike all of the previous data on the equities market, recent recoveries, this one included have come at record speed. Five years in-between market drops and recoveries is not the norm. But possibly, could be.
This may have something to do with a much larger segment of the investment market coming from 401(k) investments. Although these plans have been around for thirty years, they have not really caught on until recently and even that trend is not fully employed by those who have access to these types of plans. Pensions may have gone away but 401(k) plans have not fully replaced them with the working public.
That fact leaves many investors vulnerable to their emotions and to the forces that promote the marketplace. A recent study done by Hewitt Associates found that the vast majority, or what they termed typical, investor under the age of forty had moved some or all of their retirement funds into target date funds. Those over the age of forty found the move to bond funds more appealing. Both of these investments, albeit conservative in nature, were forgivable. They were doing what any "once bitten" investor would do.
Read more here.