However, as time goes on, the range of results widens, and the curve flattens. By May 31, the majority of the 14% that were better off by selling were only better off by a small margin. Most of the winning households only beat their personal pre-panic benchmark by a few percent or less. Further, the spike representing those lucky enough to be ahead by 10% or more is tiny.
For the 86% of the households that did not benefit from bailing out, the distribution skews heavily toward the negative. All paid a price, some dearly. The strong majority of those that lagged did so by more than a few percent and there were far more who trailed their benchmark by 20% or more than beat it by 10%.
Of course, some of the sellers tracked may not have been panicking but trying to time the market. If they were fortunate enough to get out early, they failed as timers and longer they waited to get back in the worse they would have done. I wonder how many of these cash-panickers got back in over the summer. I suspect not many, given the reporting about the cliff the economy fell off.
Vanguard’s paper ends May 31 but as we know, while other indexes were still off from their prior highs, the S&P 500 index had fully recovered in mid-August. This is a unique time in America. During this time, the headlines have been full of anxiety-producing news, so I wonder how many more people bailed out of the markets after May 31, falling behind a stay-the-course approach.
Longer term, it would be interesting to see how long it takes the cash-panickers to dip their toes in the markets again. Elections are notoriously anxiety inducing but there are plenty of other things to make a nervous person even more nervous these days.
As I reported in “Rebalancing In Real Time,” our clients that stuck with their pre-Covid holdings have done fine but those that rebalanced did better. An aggressive rebalancer who followed a modified version of what my co-author and I described in “Analyzing the Effect of Aggressive Rebalancing During Bear Markets” (Journal of Financial Planning, January 2020) did even better. I’d love to see if that pattern held true over a bigger sample set.
Speaking of rebalancing, the Vanguard study also revealed that only 17% of retail customers and just 5% of DC participants made any trades between February 19 and May 31. I can see how the DC number would be lower because so many people put their participation on auto but to have 83% do nothing is surprising. Even the most diehard buy-and-hold investor has plenty to do when a bear market arrives. I know we made some sort of change such as rebalancing or tax loss harvesting for almost every household in our care.
I wonder how many of the 83% froze from panic rather than selling, how many of the 17% reduced their equity holdings, and how many rebalanced, I also wonder if advised clients were more likely to rebalance or loss harvest.
Last, I wonder what an analysis like this will reveal in a future bear market that takes longer to unfold or recover. The Corona-crash was quick, taking a mere month to bottom. The first part of the recovery came quickly too, and the round trip only took six months. There wasn’t much time to panic. With longer journeys of the past, the story has been that people wear out, give up and capitulate. Would data like this show that?
Regardless, the advice to “stay the course” when one’s plan is sound stood up to past bear markets of varying length and ferocity and it stood up to this quick bit of terror too. I don’t know what the future holds, but I like the odds prudent long-term investors have versus the odds of trying to trade around such events. It is nice to see numbers that lend additional support to taking a long-term view.
Dan Moisand, CFP, has been featured as one of America’s top independent financial planners by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].