Don't fear the cliff: Bolster your retirement account

Dollar sign on top of a cliff.

This is what I'll be doing as the edge of the fiscal cliff comes into view: Throwing money into my retirement account.

I'm not one to try to time the market, but this seems like an obvious one.

As we get closer to the deadline, individual investors will dump stocks because they're worried the economy will plunge into another recession or tax hikes will eat into their capital gains. (Read about fiscal cliff tax implications here.)

In fact, this is already happening, according to the website Business Insider.

And guess who's buying as small investors sell?

Institutional investors and rich guys. The people who are fighting to keep income tax rates on the wealthy from increasing.

In fact, Business Insider said the first week of December marked the fastest selling by small-time investors in a year and a half.

The Reformed Broker website put it best, writing in mid-December: "Institutional investors have bought an average of $315 million worth of stocks over the last four weeks while mom & pop have dumped an average of $920 million worth."

Reformed Broker is where I found the chart below from Bank of America Merrill Lynch, showing the recent sell-off from regular investors (called Private Client).

chart showing who is buying and selling stock

This is bad.

It's also an example of why the 401(k), the do-it-yourself answer to the demise of pensions, is such a failure for most people as a retirement investing vehicle.

Individual investors are so easily scared into selling at the wrong time — usually when stocks are falling — and then try to buy back into the game when prices are high.

It's pretty hard to build a nest egg that way.

We haven't even reached the fiscal cliff (and we still may avoid it), and that's already happening, with hedge funds swooping in to take advantage of these bad moves.

Since I'm self-employed, I have a SEP-IRA. It's a retirement vehicle for the self-employed and the small business owner. Like 401(k) investors, I'm in control.

But I won't start selling out of fear. And neither should you.

Rules for a Successful 401(k) Plan

Rule 1: Choose a Roth 401(k) account if it's available. Rule 2: No Roth? Open a traditional 401(k).
Rule 3: Start small, gradually boost contributions. Rule 4: Choose the right investment.
Rule 5: Don't invest in your own company. Rule 6: Watch but don't touch.
Rule 7: Don't borrow against your 401(k).
Read more about the 7 rules here.