A new report from Dalbar, Inc. finds that investors are better off staying the course than rushing for the exit during market downturns.
The report, released on Tuesday, measured the effects of investor decisions to buy, sell and switch funds in periods of market volatility. The study suggested that the behavioural effects of the current crisis will outlast the crisis itself.
According to Dalbar, since 1984, approximately 70% of underperformance occurred during 10 periods when investors withdrew their investments during market crises.
“One major reason that investor returns are considerably lower than index returns has been the fact that many investors withdraw their investments during periods of market crises,” the report said.
The report examined the 10 most severe market downturns since 1984, including the Black Monday crash of 1987, the Sept. 11 terrorist attacks and the 2008 financial crisis.
In eight of the 10 downturns, taking no action and holding on to investments would have produced the best returns one year later. In 2008, the market lost almost 30% in the fourth quarter, but the market had fully recovered by the end of 2010, the report said.
In only one of the cases studied, investors would have been better off withdrawing assets during a crisis.
“Every market crisis is unique and presents different emotional and behavioural challenges to our investment decisions,” Cory Clark, Dalbar’s chief marketing officer, said in a release. “You are unlikely to correctly time your reentry point. So, while getting out of Dodge may seem to mitigate losses in the short run, it has often intensified losses in the long run.”
The report also outlined the benefits of a buy-and-hold strategy in more recent years.
For example, between 2016 and 2019, a buy-and-hold strategy of $100,000 earning S&P 500 returns would have earned $25,515 more than the average equity fund investor, the report said.
The report also noted that in the first two months of 2019, the average equity fund investor outperformed the S&P 500. But fear of a trade war and economic shutdown caused the average investors to fall behind the index in March (by 1.01%) and April (by 0.50%).
“The market continued to surge forward in those two months while the average investor was taking money off the table,” the report said.
By the end of 2019, the average equity fund investor earned a return of 26.14% — 5.35% lower than the S&P 500’s return of 31.49%. The average index fund investor captured a bit more of the market’s return, earning 28.68% for the year.
In 2019, the average fixed income investor experienced their best annual gain since 2012 (4.62%), but fell short of the broad bond index.