Study: Cash Panickers From COVID-19 Volatility Lost Money
When the crisis of the coronavirus and COVID-19 became real, the U.S. stock market fell 34% from it’s peak on February 19th, 2020 and bottomed out on March 23rd. Many panicked during that time period and sold equities for the apparent safety of cash.
As of this post, we know that was a bad idea.
A study from Vanguard shows us the data. At the bottom on March 23rd, the S&P 500 was at 2237.40. By the end of May when Vanguard released this report, it rose 36%.
By September 2nd it peaked at 3580.84, for a total gain from March 23rd of 60%. The September highs are all time market highs and even though it’s retracted a bit from that early September high as of this post the S&P 500 is up about 3.7% in 2020.
Those Who Sold
Vanguard customers aren’t exactly day-traders or Robinhood users. According to their data only 5% of self-directed defined contribution plan participants traded from February 19 – May 31. That percentage was slightly higher with their retail customers, 17% of whom traded during the same period.
Accounting for both groups of investors, Vanguard says less than 0.5% of clients moved to an all cash portfolio, what they call cash panicking. Here’s a chart of the breakdown of these cash panickers from the Vanguard report:
As you can see, of the people who panicked and went to all cash, the direct contribution customers had a 69% equity position with Vanguard and the retail customers had a 77% equity position. Of course these investors might have money with other companies, so this is just a window into what they did with their Vanguard investments.
Interestingly enough, the breakdown between males and females was drastically different for the two different categories of investors with males being the top cash panickers of the retail customers, but females being the majority for the defined contribution cash panickers.
How It Played Out
At the end of March, still early in the pandemic induced market sell-off, the cash panickers were doing better than buy and hold customers according to Vanguards analysis. The two investor categories were 56% and 58% better off, respectively.
But as the market started to roar back, the situation changed. The buy and hold investors started to push ahead of the cash panickers. By May 31st, 84% of the defined contribution customers were worse off than the buy and hold customers. And 86% of retail cash panickers were worse off than their buy and hold compatriots.
Vanguards analysis stops at May 31, but as the markets continued to rise into September the number of cash panickers who fared better than buy and hold investors is probably tiny, perhaps none.
Hard Learned Lesson
The cash panickers at Vanguard were a very small percentage of Vanguard’s customers, but they unfortunately had to learn a lesson the hard way. As Vanguard puts it in their study:
The vast majority of the cash panickers would have been better off leaving their portfolios untouched; as markets continue to recover, nearly all of them will have realized actual returns lower than their personal pre-panic benchmark portfolio returns. Investors should take heed of these lessons.
Investors should definitely take heed of this example – shown clearly through data – of why you don’t want to panic and sell all of your equities.
You might be saying “well what if the markets didn’t come roaring back, then they’d be ahead!” Well, yes they probably would.
But they will never know when to get back in, that’s the problem!
And as many other studies have shown they will miss out on the bottom and get back in when the market has already realized big gains. And staying in cash forever with paltry 0.5% APR rates is a losers game for sure.
In the 2008 crash tons of investors sold and didn’t know when to get back in as the markets came roaring back in 2010. That roaring back period lasted 10 years!
Could the market still be fooling us with its crazy highs in the middle of a pandemic? Absolutely. Could it come crashing down hard next year, or tomorrow? Yessiree. But here’s the thing, no one alive can predict that, and anyone who does will have gotten lucky.
A buy and hold strategy with periodic changes in asset allocation to meet risk tolerance and life circumstances is the best investment strategy, period. Reacting to the market by panic selling and trying to time is a losers game, as Vanguards report clearly shows.
After being pulled by a long bull market I think a lot of investors went through the crash for the first time ever and didn’t know what to do.
Despite the amount of money lost I held firm and just rode the storm out. This is why it is important to have an investor policy statement that lays out your plan which was hopefully created when you were not in a panic state
Ride out the storm, that’s the way to do it. Easier said than done
I panicked and sold everything but not to cash. Briefly (this is not complete) traded all my muni bond fund for corporate bond fund, Put 75% of my equity funds into a total bond fund and 25% into (lucky lucky) equity funds that were primarily tech giants. I have come out way ahead. Waiting for the election to jump back in (or not). I really have done so well – but i admit part of it was luck. But make no mistake i was in panic mode.
Wow, seems you did get lucky. Those very few tech giants are propping up the markets big time
FBGRX. Now waiting for election results.
Yep, the election is gonna be a big one as far as what the market will do for sure.
It’s amazing that after all these studies showing that time in the market outperforms market timing, people continue to panic every time the stock market sells off!
One of the challenges is how easy it is to look up your portfolio on line or on mobile, so when people see that they’re losing money they instinctively look to sell.
There has to be a technology solution to help people stay in the market and ignore their portfolio performance for their own good!
I agree, being able to see every little fluctuation in one’s net worth is probably not the best to keep a level head.
it helps to have a plan. one thing where the personal finance community at large fails in my opinion is in discussing planned asset sales. that is true if the real reason for investing is to eventually sell and use some of that money to pay for your life. it’s really hard when you’ve been an “accumulator” for so long. no matter the approach incremental is probably best for most moves so you don’t pull a hammy or lose a lot of money.
Having a plan, for sure some FI bloggers preach that, mainly WCI. As I drift closer and closer to full retirement I’m reading up much more on the best advice to switch from accumulator to rabid money consumer 🙂
Getting back in a a huge problem. When the stock keeps going down, you don’t want to put money back in because it’s down. When it’s coming up, you don’t want to put money in because you think it’ll go down. Life is way easier if you just hold. I moved a portion of my portfolio into bond (10%) in April and it’s still there. That’s okay, though. It’s part of my bond allocation. I might move it to stock at some point.
Yep, that’s the crux, when to get back in is just as big of a decision as to sell. It’s a no win proposition
Have a few older friends who did panic selling in previous recessions and missed out big time. One liquidated everything and fired her financial advisor who advised her to stay in the game and ride it out. Psychology is a big part of investing. Even before COVID, I bought a lot in January. After early signs of market bargains in February, I started buying heavily for 2 months. After that, I went back to automatic monthly purchase. Best move ever but I was very scared at the time. I’m still employed full time, but I don’t think I would do it once FIRE. Makes me think about having a 3 year living expenses in cash once FIRE even if I don’t make that much in interests.
I have the same, and one of my friends who did that in 08 later admitted to me that she screwed up. She was begging me to sell with her, she was in real panic. But I get it, the thought of losing it all is terrifying, and human emotions are strong. And for the record, My emergency fund isn’t quite 3 years, but it’s waaaay more than 3 months.
Going to all cash during such a strong market correction for me was always going to prove costly for the panic sellers. Even if the bounce back wasn’t going to send us to record highs historically you would be better off leaving it alone.
I would say the 0.5% that Vanguard references should take a look at their risk tolerance and probably find safer investment vehicles.
Yep, you would hope Vanguard would maybe reach out to them for some coaching
Ironically, I bought ~$40k of VG stock funds on 3/23, the low point in the correction. I wasn’t lucky, and I wasn’t timing the market. I was simply implementing the forced rebalancing as pre-defined in my strategy. Have a plan. Rebalance. Don’t panic.
Wow… you made a big investment on the exact day of the bottom – nothing but net dude! Congrats, that money has done quite well for sure. “Have a plan. Rebalance. Don’t panic.”, that’s the elevator speech to investing.
Excellent points Dave and really underscores the need for an investment plan!
A big factor is “risk tolerance” and people who literally lose sleep and become miserable when their investments are down. Instead of holding the course, they feel better by cashing out. I think of these folks as “fair weather investors” who seldom are successful over the long term.
Risk tolerance is everything. I was thinking it might even benefit some people to try day trading with very small amounts just to learn something about their risk tolerance. But then they might get hooked on day trading and that would be bad….
A close friend shared with me that she had moved all the money in her employer-sponsored retirement plan to cash after the initial drop. I tried to explain that her panicked reaction locked in her losses, but I doubt she was convinced. Has anyone figured out how to talk about this with friends or family in a way that helps them avoid these mistakes?
Oh man, to answer your question, not that I know of. It would depend on the person and your relationship with them, but in something like that you’re dealing with the spectrum of human emotions. Fear, pride, embarrassment etc etc. And all of it in regard to a topic that’s kinda taboo in our society as it is – money. If you figure out how to do it be sure to let everyone know 🙂
You’re so right, getting back is the problem because you’ll end up second guessing yourself and most likely end up on the sideline for a very very long time.
The whole thing is one big guessing game. I don’t like gambling and leaving things to chance
Do you know if the Vanguard analysis presumed that the folks that got out didn’t get back in during their comparison?
The argument I so often see is that “yea, but I’d get back in after the sell off!”. And of course, it’s impossible to know when you’re in the midst of that sell of that you’re at the bottom, but, that’s the way I so often hear the retort go to time in the market.
No idea about that, I read the whole study (it’s pretty short) and they didn’t mention. To your point, no one would know when to get back in. It’s just a losing strategy unless you’re super lucky.
Actually i think now is a good time to go back to “normal” investments with the sole exception of muni bonds. My two cents.