Fidelity’s latest quarterly retirement savings update had something special to celebrate the 10-year anniversary of “the bottom.”
The investment giant examined the 1.64 million portfolios that were around at the end of March 2009, near when the Great Recession hit its nadir, and that are still around today. Its analysis provided a few important reminders to investors. Most importantly: Ten years is a long time, but it’s not exactly “the long run.”
In the decade between Q1 2009 and 2019, the average 401(k) balance, which had been $52,600, grew 466% to $297,700. That’s an 18.93% increase per year. For Gen X Fidelity customers, balances were up 626%. For the millennials, which only had $7,000 on average in Fidelity 401(k)s back in 2009, the cumulative percentage change was 1,762%.
Much of the 10-year 466% gain in the average Fidelity 401(k), of course, is from contributions, not just market returns. For people earlier in their retirement saving years, contributions build a portfolio far more than investment returns do. It takes time for returns to outweigh contributions.
But a big part of the reason portfolios have grown so much does have to do with the market’s bull run. In the 2009-2019 period examined, the S&P 500 is up over 255% cumulatively, which is 13.5% per year — an enormous number.
Where is the financial crisis?
It’s also a number that has the potential to skew. As the New York Times pointed out, the 10-year stock window just cycled out the troubles of the mid-aughts, taking out the trash and expunging the market’s record like a delinquent youth who’s has grown up.
There is an unfortunate and dangerous downside, however. Not having the bad parts of the market’s history in a common performance metric – and instead having a nice upward slope – makes for a very misleading interpretation of the data for anyone who looks at 10-year data.
It’s essentially the opposite of a credit report. Most black marks on someone's credit report stay for seven years. (A Chapter 7 bankruptcy stays for 10.) The thinking goes, a person’s behavior older than that isn’t useful anymore in predicting how good they are with your money.
But the market is not a credit report. The economy works in cycles and the length of this expansion is simply too long to be contained in a standard 10-year window. Past 10-year return is often something people look at when evaluating whether to buy or sell a security like an ETF, mutual fund, or stock.
Past results aren’t a guarantee of future performance, but many people invest that way. And looking at numbers that high from period with no a bear market could skew the expectations.
10 years has changed a lot
Besides the 466% average change in balances that were around back in March 2009, the components of portfolios has changed a great deal. Back in 2009, just 16% of investors held target-date funds. Today, over 52% of 401(k) accounts use target-date funds to diversify. In general, Fidelity reported, diversification has grown considerably. Whereas 15% of customers had all individual stocks in their 401(k) accounts 10 years ago, only 7% of individuals still invest like that, as the popularity of index funds and other easy ways to buy the market increased.
Fidelity also noted that this quarter had the highest 401(k) employee contribution numbers in history, up 15% from a year ago to $2,379 in the first three months of the year. The amount of money employers are willing to contribute were similarly at record highs, with the percentage match notching 4.7% of employee salaries on average, pushing the overall savings rate to 13.5% — another all-time high.
While markets have been turbulent lately, most retail investors will likely continue contributing to their 401(k)s (it’s probably on auto). This is the beauty of dollar-cost averaging. For this pay period, at least, the market is cheaper. And in another 10-years? No one knows, but it’ll probably go up — it usually does. But perhaps not by 13.5%.