A recent report by Vanguard on equity abandonment analyzed the activity of 2.7 million IRA investors from the beginning of 2007 through October 2009 and found results in Vanguard’s administrative data that are consistent with a spring 2009 Vanguard survey of U.S. investors.
The majority of the individual investors held steady with their stock holdings during that period, with only about 1% of them selling out of the market at the peak of its volatility in October 2008. Those who were inclined to abandon equities altogether were:
- Men, who were 10% more likely to discard equities than women. While the reasons for this difference were not discernable in this data, prior academic research* has suggested that in general, men may trade more actively than women as a result of greater overconfidence in their ability to make good investment decisions.
- People age 65 or older, who were more than twice as likely to abandon equities as investors between the ages of 45 and 54. This is consistent with the widely held belief that investors become more risk averse as they age.
- Investors with a low level of equity exposure, who may have a lower tolerance for risk and therefore were more likely to abandon equities during increased volatility. Or it could be that investors who began with a higher equity allocation merely reduced equity exposure without reaching zero (the planned subject of future research).
Conversely, balanced investors tended to stick with their funds, especially those who held only one balanced fund, which includes both stocks and bonds. The abandonment rate of these balanced investors was about 50% lower than that of investors who owned equity funds, but no balanced funds.
Through November 2009, investors pulled $500 billion from money market funds, and, despite one of the strongest bull markets in history, withdrew $9 billion from stock funds. During the same period, bond funds attracted $340 billion — presumably from investors unnerved by the quickest severe market decline in U.S. history.
“Investors who opted for money market funds during the crisis may have been ready to take on more risk as the rebound became stronger, and considered bond funds the logical next step instead of the greater potential risk associated with equity funds,” said Francis Kinniry, a principal in the Vanguard Investment Strategy Group in a statement. “However, while investors may think bonds are safe, they should recognize the risk that rising interest rates pose to bond fund prices. At the same time, investors may benefit from rising rates in the form of higher yields.”
The report also reaffirms the value of prudent diversification. For instance, from the start of the bear market in 2007 through December 31, 2009, an investor with a 100% stock portfolio lost nearly 25% while an investor with a 50% stocks/50% bonds portfolio lost only 5%. “Diversification worked for investors who maintained a well-balanced approach and stayed steadfast with their strategic investment plan,” Kinniry said.
To help investors better understand bond funds, Vanguard prepared a special report on its website. The report features articles, a video, a podcast, and a blog post on the bond market and the risks and rewards associated with bond funds.