THE BLOG
08/04/2014 01:26 pm ET | Updated Oct 04, 2014

Proof That Sticking With the Plan Works

It works! Making an investment plan and sticking to it -- even in the most frightening times -- does work in the long run. And that's good to know as the market regains some of its volatility and makes headlines with daily price moves. You can ignore the most extreme pundits and sleep better if you have the self-discipline to keep investing for the long run.

A new study confirms that those who had the discipline to stay invested and keep their regular plan of adding more money to their 40l(k) plan during the fearful investing period of 2007 through 2012 came out winners despite the huge market decline early in that period.

The Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) studied real life retirement accounts and found that at year-end 2012, the average account balance of the "consistent participants" was 67 percent higher than the average account balance of all participants in their huge database of 24 million plan participants. Within that group, only about 7.5 million were considered consistent participants.

Even more impressive, the consistent investor group's median account balance increased at a compound annual average growth rate of 11.9 percent over the period - almost three times the median balance of all participants (including those who made adjustments out of stock funds, stopped contributing for a part or all of the period, or otherwise did not stick to their plan.)

What's clear from this study is that self-discipline in staying with an investment plan is one of the key ingredients of success over the long run. Or to put it more obviously, there are a lot of people kicking themselves for selling out at the bottom in March, 2008 with the DJIA below 6800. But, of course, panic selling is what makes market bottoms. All those people who figured they couldn't take one more day or one more dollar of losses guaranteed the success of others who were either smart or paralyzed by fear and continued to invest.

Target Date Funds Give Stock Exposure

The study also confirms the benefit of Target Date funds, which became a "safe harbor' default option for 40l(k) plans in the past decade. That is, instead of "defaulting" employee contributions into money funds, plan administrators were encouraged to automatically put contributions into target date retirement funds. These funds are designed to adjust the investment mix as participants near retirement age. That exposes younger participants to more stock market investments, despite their very human fear of "losing money."

While there is still great debate over whether target date funds perform better than a portfolio of well-chosen mutual funds, the overall benefit is clear. Most employees don't have the experience, interest, or discipline to choose and rebalance the various mutual funds that are offered in the plan. The target date funds will at least give them some of what is good for them! And they are more likely to stick with these investments, figuring (not really accurately) that "someone else" is looking out for them.

The study shows that at year-end 2007, 27.6 percent of those "consistent participants" in 40l(k) plans held at least some target date funds in their accounts. And by year-end 2012, that number had grown to 32.1 percent holding some target date funds.

The younger employees are really getting the message. Nearly 44 percent of employees in their twenties had target date funds in their 40l(k) accounts at year end 2012, compared with 28.4 percent of participants in their sixties.

Now What at Dow Near All-Time Highs?

The worst thing about getting out of the market at the wrong time is that you then have to figure out when to get back in!

Today, with the Dow backing off from 17,000, those who sold long ago are wondering whether it's too late to invest in stocks or whether this is their last chance to get in. And there are enough of them sitting on the sidelines, plus all the money sloshing around with few other investment alternatives, to push the market higher.

Despite the Fed's most recent plan to cut another $10 billion from the stimulus plan, there is a lot of money already out there - wondering where to go. And as long as other central banks - Japan, EEC, and even China - are saying they will keep creating liquidity to get their economies growing, there will be plenty of fuel for the market fire.

No one ever knows when the market has reached its top. (Well, in every cycle there is at least one person who sells at the top, and brags about it later!) And history shows that on the way to the top there are many who predict the end of the bull run is near.

But for people who are trying to build up a retirement plan over the long run, the EBRI study shows that if you will make a plan of regular stock market investing - and stick to that plan when everyone else is ruled by fear and greed - then you will come out ahead in the long run.

It's good to have that proof. And there are at least 7.5 million 40l(k) plan participants who are seeing that proof in their retirement account balances. That's the Savage Truth.

7 Cities With Best Bang For Your Buck