One of the basic rules of financial responsibility is staying on top of your accounts. You should know your credit score, how much you have in your emergency fund, and what's going on with your credit card balances.
But with your 401(k) account, a certain amount of ignorance is bliss. CNBC Select spoke with Sarah Newcomb, a behavioral economist for Morningstar, about why checking this retirement account too often can cause harmful consequences.
Why checking your 401(k) can (sometimes) be a bad move
Essentially, when we check our investments during a downturn and see that our portfolio values have sustained some loss, we panic and think we need to take action in order to preserve our money. This often means selling some assets — sometimes at a loss — and reinvesting the money when the market is doing well again.
But when we check our investments during an upswing and see an increase in our portfolio values, we might, sometimes falsely, believe that our investments are doing well because we're good at picking stocks and other assets. "Overconfidence is a huge problem for a lot of us because we love to take credit when the market is up and blame external forces when markets are down," Newcomb explains. "The danger of checking during peak moments is that cognitively you anchor on that really high number as if you have that money in the bank. But if the market is down tomorrow, you will feel like you’ve lost money."
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When should you check your 401(k) balance?
While focusing too much on the ups and downs of your 401(k) can be counterproductive, remaining completely oblivious to your retirement portfolio isn't something Newcomb recommends. Instead, she advises people to create meaningful benchmarks to help them better track if their 401(k) is performing as expected.
"Look at how you're doing compared to where you need to be right now to reach your goals in the future," she says.
In order to devise your personal set of financial benchmarks, you need to know what financial goals you're working toward. It can help to work with a financial professional who can help you figure out what the goals and benchmarks look like. Remember that those benchmarks need to be meaningful to you and your goals but they should also be realistic. Here are some general retirement savings goals taken from Fidelity that might be a good place for you to start when coming up with your benchmarks:
- Have the equivalent of your annual salary saved by age 30
- Have three times your income by age 40
- Have six times your income by age 50
- Have eight times your income saved by age 60
- Have ten times your income saved by age 67
There's also a wealth of other tools on the market, like robo-advisors, that can help measure things like your risk tolerance and time horizon before retirement in order to recommend and rebalance your asset allocation to fit your needs. Wealthfront and Betterment are two popular robo-advisors for this reason. Such a hands-off approach can be instrumental in making sure that you don't make an investment decision purely out of emotion.
Wealthfront
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
Fees
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
Bonus
None
Investment vehicles
Investment options
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
Educational resources
Offers free financial planning for college planning, retirement and homebuying
Terms apply.
Betterment
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
Investment vehicles
Robo-advisor: Betterment Digital Investing IRA: Betterment Traditional, Roth and SEP IRAs 401(k): Betterment 401(k) for employers
Investment options
Stocks, bonds, ETFs and cash
Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Bottom line
While it's natural to want to check in on your 401(k) balance or other investment account balances throughout the year, it's important to make sure you're being thoughtful about why you're checking in. It's recommended that you work with a financial planner to establish financial goals and meaningful benchmarks along the way.
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