A snapshot of investor behavior during a downturn

The courage to stay the course

We’ve long professed that short-term market movements—whether up or down—should not dictate one’s investment strategy. The data show that Vanguard investors agree, and the overwhelming majority stayed invested through the recent volatility. Less than 0.5% of investors abandoned their portfolios and moved entirely to cash. A willingness to weather sudden market drops is an important part of long-term investing. Although it is a natural instinct to seek to preserve capital when the market drops precipitously, too often investors remain on the sidelines and miss the inevitable recovery.

Back in March, we reminded investors to stay the course. A balanced, diversified portfolio is built to weather tough markets. The majority of investors (83%) held fast from late February to May and didn’t transact. Even better, 9% of our clients rebalanced into the storm, buying equities and regaining their targeted asset allocations. Rebalancing helps mitigate risk, and it is a staple of our advice.

Investors in Vanguard retirement accounts have shown the lowest proclivity to trade. IRA holders and participants in defined contribution plans trade at minimal levels and far less than other cohorts. They truly keep a long-term perspective and don’t get thrown off by short-term volatility. Why is staying the course so important? As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the U.S. stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Our analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.

Even-keeled at all times

Just as investors should stay even-keeled during downturns, they should ignore the euphoria of a sudden surge in the market and the fear of missing out on easy gains. One byproduct of the market churn is the renaissance of day trading among individual investors. Online brokerage platforms saw new accounts spike in the early part of 2020, with many of these investors looking to capitalize on “hot” stocks or engage in speculative moves. Fortunately, the vast majority of Vanguard investors are staying disciplined and avoiding speculation. We have seen this movie before and know how it ends for the FOMO crowd—an expensive lesson about diversification.