Your 401(k) Is Up. Don’t Let It Go to Your Head.
Checking your 401(k) is the feel-good move of the year. After last week’s stock-market rally, it now feels safe to peek at your 401(k) balance again. That is a relief for the millions of people whose retirement accounts are still recovering from the bruising they took in 2022, when the S&P 500’s total return was -18.11%.
Vanguard’s 2030 target-date fund, which is geared to people retiring around that year, is up 14.50% in 2023 through Friday, according to FactSet. Its 2060 fund, which has a longer time horizon and more in equities, is up 18.21%. Those same funds were down 18.35% and 19.17% respectively in 2022.
Don’t let your self-worth balloon along with your net worth, financial advisers warn. They say the overconfidence that comes with making big gains can cause people to take bigger risks with their investments. “With the S&P up more than 20%, you don’t have to be that smart to have made a lot of money" this year, said Scott Nations, an options trader and the author of a book about the psychology of investing.
“It makes us feel like we’re savvier investors than we really are." Neuroscience backs up the idea of overconfidence being a problem. Increases in dopamine, a brain chemical that likely gets released when you see large returns in your account, can lead to more financial risk-taking, research on the brain has found. You can still celebrate a little.
Some retirement savers have cheered the performance of their 401(k)s on social media, noting they look forward to hopefully getting to spend the money in coming decades. The Federal Reserve’s forecast last week of three rate cuts in 2024 had an instant impact on this year’s returns. All three major stock indexes rose, with the Dow Jones Industrial Average ending the
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