Investors have poured more than $3 billion into money market funds– the market’s “under-the-mattress” cash equivalent. The more worrying data comes from last month, when investors withdrew $48 billion from stock funds.
Here’s the dilemma: If an investor missed the 36 percent decrease in the S&P 500 in 2008 – or even worse, bailed on the markets mid-carnage – they more than likely also missed the 26 percent hike in the S&P 500 in 2009, and the next three positive years for the index that came after. In 2011, investors took out another $94 billion from stock funds, and in 2012 another $129 billion, when the S&P 500 saw 16 percent gains. “The global financial crisis created such a high level of risk aversion that people didn’t just wait for the start of the rebound. In some cases, they waited for years,” stated Kristina Hooper, U.S. investment strategist at Allianz Global Investors.
“I can’t tell you how many investors I came across in 2011, 2012 and even 2013 who had missed out on a lot of the comeback in the stock market and were still sitting in cash.” Jeff Tjornehoj stated. He calls the problem of the do-nothing investor: More times than not, the do-nothing investor perform better. “It’s a rocky ride, but the do-nothing investor would have been fine and avoided headaches,” Tjornehoj added, talking about those who remained invested through the crash.
He noted, “If you know precisely how to move between stocks and bonds and everything else, you would have done better, but how many investors know how to do that?” “The big issue is that when you go to cash, you have to be right twice,” quoted Mitch Goldberg, financial advisor and president of Dix Hills. He noted, “First, you have to be right about getting your timing correct when you sell. If you are selling because it is your panic reaction in a down market, I think it’s fair to say you probably got that part of the decision wrong. The second part you have to get right is the timing of your buy orders. And if you are waiting for the perfect time to buy, you’ll never pull the trigger.” And here’s a point that many investors who plan to be smarter than the “Herd” miss, particularly in markets like the one investors saw last week, with large swings in the normal day-to-day.
A move to cash works against the investor to a greater degree when there is higher volatility. “Friday’s gains in global equity markets is evidence of how investors who just binged on cash are missing out on a big rebound,” Goldberg said. Investors who missed the three biggest days of each year see their gains go down dramatically.
In the market-timing approach, if an investor invests the same $100 at the start of each year but misses the best three days of the year, the total gain was $2,953. “The pleasure and pain of investing. The key problem I see when investors go to cash has a lot to do with procrastination,” Goldberg added.
He commented the four-step process has one purpose: to bring the vast majority of investors back to the conclusion that they shouldn’t get out of the market. “The market has historically paid investors a premium over cash and bonds precisely because it requires investors to endure times of volatility,” Maurer said.
Sell-offs are by nature messy and create a infection of concern, and investors believe that when stocks declines 10 percent in value, there’s something “the market knows” but a Main Street investor doesn’t.
If any retiree has a portfolio built with investments that would collectively go to zero in a stock market correction, the only question worth asking is, who created your portfolio, and how fast can you fire them? There’s a reason that famous investors like Vanguard Group’s Jack Bogle and Buffett repeatedly express and live by the “stay the course” mantra.