Record high?

It seems like we are hearing daily about record highs in the markets.  The result of that is record 401K balances.  When we speak to employees about their retirement accounts, we frequently hear about that persons high water mark.  That is, what is the absolute most they have ever had in their account.

It is similar to the way people perceive the value of their home.  If it was worth 600K in 2006, then they feel like that it is at least worth that in 2009 if not more.  This is despite the fact that they could look around at their neighbors and see foreclosed homes and a collapse in their local real estate market.

When planning for retirement, it is always better to focus on the averages.  Yes, you might be at  a high water mark today but that doesn’t mean you will be there in six months or six years.  Should I sell then?  That is the next logical question.  The long and short of it is markets can run at high valuations for long periods of time.  While you are waiting for the bottom to drop out, it is possible things move further north and by the time the inevitable correction or recession occurs, you have still lost money by waiting for that key moment to jump back in.

Investing can be maddening.  It isn’t easy, it isn’t intuitive, and we aren’t really wired for it.  For retirement investors the best thing they can do is stick to what they control.  Focus on your savings rate.  Focus on your spending.  Invest in a diversified manner with risk commensurate with the timing of your spending need.  And avoid all the noise.