U.S. private pensions primarily consist of two pillars: 401(k) plans offered by companies to employees, and IRAs (Individual Retirement Accounts) set up by individuals. These two types exhibit different behaviors during periods of market fluctuation.
Asset allocation in 401(k) plans has remained largely unchanged. This is because about 70% of participants utilize products that automatically adjust investments based on age, or opt for automated management services where experts handle investments.
In contrast, with IRAs, individuals typically choose their own investments.1 This leads to active trading, with funds flowing out of U.S. Treasury bonds and foreign stocks into MMFs (Money Market Funds) and U.S. equities in April. In May, as a sense of security spread, there was a reversal, indicating a sensitive, market-following trend.
During past major market fluctuations, such as the Lehman Shock and the COVID-19 Shock, automatic management in 401(k) plans maintained asset allocation and yielded stable returns. Conversely, IRAs, with their greater room for individual discretion, saw rapid asset movements. As a result, many underperformed the market average due to increased transaction costs and delayed trading timing.
Japanese Investor Behavior During Market Volatility
Now, how did Japanese investors react to the recent rapid market changes? While there are no immediate figures for defined contribution pensions, many general investors refrained from selling despite unrealized losses and diligently continued their systematic investments. Some may have re-emphasized “long-term, systematic, and diversified” investing, while others may have simply had no choice but to watch. However, the U.S. lesson is that a “do-nothing strategy” contributes to higher returns in the long term.
Japanese investment behavior, in terms of choosing their own products, is similar to IRAs, but in terms of not trading frequently, it’s closer to 401(k)s. Whether intentional or a result of inaction, this seems to have worked well, and currently, Japanese investors appear to be successfully navigating the intense market fluctuations.
(Haruka Urata, Representative, Urata Management & Finance Lab)
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