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Those who withdraw investments during periods of market volatility will rue the day, at least according to Dalbar in its 26th Annual Quantitative Analysis of Investor Behavior study that measures the effects of investor decisions over short and long time frames. In fact, since 1984, the study found 70% of average investor underperformance happened during 10 key periods of market crisis when they took action, i.e. buying or selling, instead of staying the course.

During those 10 worst cases of underperformance, periods between September 1986 to October 2008, the study found eight would have produced better returns as soon as one year later if investors wouldn’t have taken any action.

Dalbar also found that in one case, during the October 1987 stock drop, investors would have produced better results one year later if they had purchased portfolio insurance, a strategy that purchases index puts that protect the investor from a downturn, but allows them to participate in an upturn.

And in one case, September 2001, investors would have done better a year later had they withdrawn assets.

If investors had ridden out the financial crisis of 2008, when there was a 30% market loss, they would have fully recovered their investments by 2010.

A buy-and-hold investment of $100,000 earning S&P 500 returns would have gotten these results, according to the study:

  • $25,515 more than the average equity fund investor from 2016-2019
  • $16,228 more than the average equity fund investor from 2017-2019
  • $12,129 more than the average equity fund investor from 2018-2019
  • $5,936 more than the average equity fund investor in 2019.

Fixed income investors had the same experience. For example, in 2019 bonds had their best annual gain since 2012, earning 4.62%, states the study, but still short of the Bloomberg Barclays Aggregate Bond Index returns of 8.72%.

The good news is investors have “displayed patience” by maintaining investments an average of six months longer, to 4.5 years in equity funds. Bond investors’ retention rates rose to 3.6 years from 3 years.

Market Views

It’s no surprise that many investors are swayed by market forecasts. “These opinions serve to maintain the investors’ awareness of unpredictability, thus increasing the vulnerability to market changes,” according to the study. “The result is that market changes initiate a call to action, which often translates to withdrawal … [that] takes place after the decline and is only productive if additional declines occur.”

The study noted that during a crisis, investors often reject the “alternative of taking no action, even though historical evidence is overwhelming that … is most often the best course.”

Those who do want to take action, states the study, should consider portfolio insurance that helps avoid “the more costly and imprudent course of a full withdrawal,” Dalbar states.

According to Cory Clark, Dalbar’s chief marketing officer, “If there is one thing the average investor can take away from our study, I hope It will be this: 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 over the long run.”

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