Some Encouraging Data from Vanguard on Investor Behavior

Cheri Franklin |

Even though the COVID-19 pandemic is far from over, as far as the stock market is concerned, it never even happened. The S&P 500 Index, after losing 34% in just over a month, has completely recovered. Investors who moved to cash during the dark days of March have learned a harsh lesson in the futility of market-timing.

The good people at Vanguard recently shared their data on what they call “cash-panickers.” Fortunately, less than 0.5% of Vanguard investors moved to cash during the downturn. The overwhelming majority (95% of retirement plan participants and 83% of brokerage clients) refrained from trading altogether. Unsurprisingly, Vanguard found that about 85% of investors who moved to cash would have been better off had they simply left their portfolio alone.

To be successful at market-timing, an investor must be correct not just on the decision of when to exit but when to re-enter the stock market. This is why the legendary John Bogle said (regarding the concept of market signals), “The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently.”

Another contributing factor to the extreme difficulty of market-timing is the concentration of the market’s return into a relatively few days. In the most recent upturn from March 23rd to today (8/17/2020), 98% of the market’s gain occurred in just 10 days, none of which were consecutive (based on the S&P 500 Index).

During our many years in the financial services industry, we have observed that investors are best served when they commit to a portfolio at a risk level in accordance with their willingness, ability, and need to take on risk. Furthermore, regardless of what happens in the financial markets, successful investors stay in their seats.