In Equity Abandonment in 2008-2009: Lower Among Balanced Fund Investors, Vanguard researchers found that only a very small percentage of equity investors sold out of the market entirely during the market tumult. According to a press release, the equity abandonment report analyzed the activity of 2.7 million IRA investors from the beginning of 2007 through October 2009, and found only about 1% of them selling out of the market at the peak of its volatility in October 2008.
Men were 10% more likely to discard equities than women. Vanguard said 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 were more than twice as likely to abandon equities as investors between the ages of 45 and 54 – consistent with the widely held belief that investors become more risk averse as they age, the press release said. Vanguard also found investors with a low level of equity exposure were more likely to abandon equities.
Meanwhile, 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 and no balanced funds.
Too Timid to Come Back?
In a separate report, 2009: A Return to Risk-Taking, Vanguard researchers examined industry cash flow data in 2009 and determined that investors’ heavy preference for bond funds over stock funds during the equity market recovery was the reverse of that seen in previous revivals.
In the risk-taking report, Vanguard noted that investors typically react to the start of a bull market by earmarking money to equities as prices rebound. In 2003, when the last bull market began, investors pulled $265 billion from money market funds and placed $152 billion and $51 billion in equity funds and bond funds, respectively, according to the press release.
However, 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.
"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 the press release. However, Kinniry warned that investors should recognize that bond funds are not risk-free (see Bond Fund Investors Beware).
Vanguard has prepared a special report to help investors better understand bond funds, available here.
The risk-taking report also reaffirms the value of prudent diversification, pointing out that 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%.