In 2018, before the marketturmoil, estimates from Fidelity suggested that about a millionpeople had more than $1 million in their 401(k) accounts; about 18percent of those accounts were Fidelity clients. (Photo:Shutterstock)

(Bloomberg Opinion) — Fidelity Investments' quarterly data dumparrived last week, featuring loads of information about itsretirement-account holders. It was eye-opening,to say the least.

Recall last summer when we noted therewas about $1 trillion in 401(k) and other retirement accounts.**

The estimates from Fidelity suggested that about a millionpeople had more than $1 million in their 401(k) accounts; about 18percent of those accounts were Fidelity clients.

Alas, that was then, when the market's upward trend was stillintact.

Soon after, the fourth quarter arrived, bringing anguish as itwiped almost 20 percent of the value of the Standard & Poor's500 Index. Many overseas markets had an even worse time.

The pullback led some to speculate that the long string of gainsdating back to the end of the financial crisis almost a decade agowas in danger. The bull market, long in the tooth, according tosome, was finally ending.

Given the hoopla over the 1 million 401(k) millionaires,Fidelity's most recent update contains a fascinating tidbit: Thenumber of people in that group fell by more than 28 percent in thefourth quarter. For Fidelity, about 50,000 of its account holdersdropped out of the 401(k) millionaires club.

The market drop may have created lots of anguish, but it wasalso perfectly normal. Despite the fretting and hand-wringing,market volatility is an enduring feature of markets, not someanomaly. I am not being glib, but rather, merely pointing out theobvious based on historical data.

Consider for a moment what the market would be like if all ofthe angst-inducing declines, daily noise and emotional turmoil didnot occur. What would exist in its place would be a placid,low-risk, low-return marketplace, where little of consequenceactually happened.

The overall trend would be modestly upward, with modest totalreturns. After all, returns are a direct function of risk, and riskitself is a function of the potential to generate less than yourexpected returns.

Thus, with the lower likelihood of not getting what youexpected, and less risk, returns would naturally be much lower.

A stock market with less volatility and smaller declines wouldlook more like the government bond market than equity markets.

We already have that, and the U.S. Treasury market serves a verydifferent purpose for investors, providing a safe, modest returnwith minimal risk and a very high expectation of delivering on thenominal returns promised.

Treasuries do have some volatility; why in some calendar years,the 10-year U.S. government bond has had declines of as much as 5percent!

What the U.S. Treasury investor gets, besides the full faith andcredit of the U.S. making good on that promise, are modestafter-inflation returns, and much less price movement.

Again, this is by design.

As we discussed before, generating returns is a function ofaccepting, or even embracing risk. The problem for most investorsis that this induces a terribly trying emotional state.

Evolution has created within us a desire to avoid most types ofrisk, lest we end up as someone else's lunch — both metaphoricallyand literally. The risks we do embrace tend to be those that helpthe perpetuation of the species. Optimism bias is a perfect exampleof this. Why else would 12 guys with sharpened sticks believe theycould take down an enormous woolly mammoth? Sure, only eight cameback, but those that did had meat and furs to survive the long coldwinter. The species continued, minus a few unfortunates.

Our relationship with risk has evolved over time and under verydifferent circumstances from those we find in modern capitalmarkets. We both need and fear risk if we want to achieve anythingof value. This includes both investor returns, as well the successof the species.

In other words, if investors want to avoid the sort ofvolatility we saw in the fourth quarter, they only have to give upmuch of the returns to get it. Anything else smacks of the illusoryfree lunch of getting returns without the risk.

**The broader discussion was about how easyor difficult it was to reach $1 million in a 401(k) plan. If youwere starting out today, it is relatively simple: “Assume azero-starting balance, make the maximum annual pretax contributionof $18,500, generate investment returns of a mere 6 percentannually from a low-risk portfolio of 60 percent stocks and 40percent bonds. Even without a matching contribution from youremployer, in 30 years that will be worth $1,509,687.”

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