Q4 market rollercoaster reveals pitfalls of retirement planning

The roller-coaster market in the final quarter of 2024 offers some important lessons about how advisors should approach retirement planning with their clients.

While November’s election fueled market gains, with the S&P 500 ending the month up 5.9%, the index failed to show up at the much-anticipated Santa Claus rally and signals from Federal Reserve Chairman Jerome Powell over the next one. It fell 2.4% month-on-month and the rate of interest rate cuts will be slower in the future.

But despite the turmoil, U.S. investors have been remarkably restrained. Data from the Alight 401(k) Index shows that on average only 0.011% of 401(k) balances were traded daily in December. Only two of the 21 trading days this month saw significant spikes in trading activity, including on Dec. 18, when Powell warned that interest rate cuts would slow in 2025 and 401(k) trading activity jumped fivefold .

For advisors, this suggests that most people prefer a one-time approach to retirement investing that they can decide once and never touch again. The enduring popularity of target-date funds also speaks to this, although Alight’s Rob Austin points out that target-date funds also see their largest withdrawals in December. This suggests that on those truly volatile days, such as December 18, investors may even view target-date funds as too risky.

Therefore, it is important that advisors work with clients to select target-date funds whose dates and risk profile are truly appropriate for the client so that they have the confidence to stay the course.

Another lesson is that even hands-off clients, even in largely hands-off markets, are likely to look for changes during major market events. Advisors need to be prepared, have plans for how to respond, and make adjustments and reviews to reassure and readjust.

Of the 21 trading days in December, stock funds were the most heavily traded among 401(k) accounts, according to Alight. This suggests that retirement investors may be overinvesting in stocks, giving up the benefits of diversification. Recent stock market performance makes this understandable, but advisors should be prepared to advise clients on the risks of abandoning diversification.