Fidelity Investments' quarterly data dump arrived last week, featuring loads of information about its retirement-account holders. It was eye-opening, to say the least.
Recall last summer when we noted there was about $1 trillion in 401(k) and other retirement accounts. The estimates from Fidelity suggested that about a million people had more than $1 million in their 401(k) accounts; about 18 percent of those accounts were Fidelity clients.
Alas, that was then, when the market's upward trend was still intact. Soon after, the fourth quarter arrived, bringing anguish as it wiped almost 20 percent of the value of the Standard & Poor's 500 Index. Many overseas markets had an even worse time. The pullback led some to speculate that the long string of gains dating back to the end of the financial crisis almost a decade ago was in danger. The bull market, long in the tooth, according to some, was finally ending.
Given the hoopla over the 1 million 401(k) millionaires, Fidelity's most recent update contains a fascinating tidbit: The number of people in that group fell by more than 28 percent in the fourth quarter. For Fidelity, about 50,000 of its account holders dropped out of the 401(k) millionaires club.
The market drop may have created lots of anguish, but it was also perfectly normal. Despite the fretting and hand-wringing, market volatility is an enduring feature of markets, not some anomaly. I am not being glib, but rather, merely pointing out the obvious based on historical data.
Consider for a moment what the market would be like if all of the angst-inducing declines, daily noise and emotional turmoil did not occur. What would exist in its place would be a placid, low-risk, low-return marketplace, where little of consequence actually happened. The overall trend would be modestly upward, with modest total returns. After all, returns are a direct function of risk, and risk itself is a function of the potential to generate less than your expected returns. Thus, with the lower likelihood of not getting what you expected, and less risk, returns would naturally be much lower.
A stock market with less volatility and smaller declines would look more like the government bond market than equity markets. We already have that, and the U.S. Treasury market serves a very different purpose for investors, providing a safe, modest return with minimal risk and a very high expectation of delivering on the nominal returns promised.
Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of "Bailout Nation."
