Here’s some good news: more Americans have more than a million dollars or more in their retirement accounts than ever before. According to the latest data from Fidelity Investments.
The Boston-based investment giant says the number of 401 (k) accounts with seven-digit balances rose 84 percent in the twelve months ended June 30 to 412,000, while the IRA number of seven figures rose more than 64% to 341,600.
Overall, the number of accounts with a million dollars or more grew by 74.5%, but it is unclear how many people this represents, as investors may have multiple accounts.
Read: This record is now the average balance of 401 (k)
While this is fantastic news, it should come as no surprise: the stock market has been soaring. Last week we reported that the S&P 500 SPX,
—The widely monitored investment benchmark — has almost doubled since the low pandemic of March 2020. Think about it: if you had put money in an index fund that reflected the S&P, you would have doubled your money in a year and half without breaking them.
Not much better than that.
Since Fidelity data covers only the twelve months ended June 30, it is not possible to see if investors have also doubled their money since the pandemic minimum. So I posted the numbers. But even before I did, I thought the answer was no, because almost no one (not even Fidelity’s well-paid portfolio managers themselves) can get past the benchmark very often.
Indeed, a comparison of apples to apples shows that the S&P 500 rose approximately 39% during the twelve months ended June 30th. Fidelity says its 401 (k) average balance increased “only” by 24% over the same period, while its average IRA balance had grown 21%. It is a safe bet that the full period from March 2020 to August 2021 would have shown a similar performance gap.
But what? A 24% or 21% gain in a year is fabulous. And there’s a good reason not to skip the benchmark – because if you’re a wise investor, you shouldn’t have all your eggs in one basket like the S&P 500.
Diversification, by sharing your investments, is one of the cardinal rules for good long-term investment. Distribute your bets: stocks, bonds, commodities, real estate and don’t forget to have cash while you participate. And within each of these asset classes, are there subclasses: large-cap stocks, mid-value stocks, and small-cap stocks? Growth or value? US or international? Europe, Asia, Latin America or fast-growing Africa? The same kind of election awaits in the bonds. Government bonds? Corporate? Munis? Degree of investment or rubbish? Long term or short term? Again and again, the options are endless.
My 401 (k) and IRA accounts haven’t doubled since the pandemic minimum, but both are high enough to make me happy, and the fact that it’s well diversified means I sleep well at night. Sleep well at night? That means a good return on my money.
Diversification is very important because you never know when an asset class will fall. I don’t know about you, but I certainly didn’t know in early 2020 that we were about to be killed by a bear market, nor could I guess – and no one else – that it would only last 33 days. After all, a century ago, the average length of a bear market was 302 days, according to data from Yardeni Research. Average means that half of all bear markets lasted longer than that. Being diversified helps when the sea becomes rough.
The big gains that so many Americans have seen also remind us that it’s time to rebalance their portfolios. Wise investors always have a plan and maybe yours involves having, say, 70% of your shares in stocks. But since stocks have gone so well, now your portfolio could be a little heavy on equities.
It’s probably a good idea to rebalance (reduce 70% of the actions according to your plan). Investment advisers — and you should have one if you don’t — will generally advise you to rebalance regularly, perhaps once or twice a year. Sell a little of what you’ve done well, buy a little of what you haven’t. Again, the goal here is to avoid having too many eggs in one basket.
Now for the not so good news. While the Fidelity data is hilarious, it reminds me of something that isn’t. A whole generation after the birth of 401 (k), more than five million employers in the United States still do not offer this to their employees. This means, according to a study by the American Retirement Association, that some 28 million full-time workers — and another 23 million part-time workers — are at a disadvantage when it comes to saving for retirement.
Fidelity data shows hundreds of thousands of people with multi-million dollar retirement accounts, and I say hurrah for them. His golden years look good.
Now, if only we could do more to help the tens of millions of Americans left behind.