During the first quarter of 2020, the majority of defined contribution (DC) plan and retail investors saw wealth declines, but widening the view revealed a different picture, according to Vanguard data.
Vanguard examined the changes in U.S. household wealth during the first quarter of 2020 and then “widened” or broadened the frame of to include one- and three-year perspectives. Changes in wealth are a function of market returns, new contributions and any withdrawals. Data is based on 6.5 million Vanguard DC plan and retail investor households that were continuous investors between March 31, 2017, and March 31, 2020.
During the first quarter of 2020, both DC and retail households experienced wealth declines of 14%—a figure nearly identical to the return of a 70% stock/30% bond benchmark portfolio during that time, the study report says. Vanguard notes that DC and retail households with zero equity had essentially no change in wealth. At the other extreme, both DC and retail investors with all-equity allocations had wealth declines of 20%—nearly identical to the 19% decline of the S&P 500 Index. Generational wealth declines were highest for the Millennial and Generation X cohorts, which tend to hold higher equity allocations than the early Baby Boomer and Silent Generation cohorts.
When Vanguard extended the time frame to cover the one-year period that ended March 31, declines were more muted. DC investors with equity allocations of less than 75% saw their wealth increase or stay the same. Vanguard says this was partly due to ongoing contributions. DC and retail investors with 100% equity allocations had wealth declines of 7% to 8%.
When it widened the study’s time frame to three years, nearly all investors saw increases in wealth. Over three years, 89% of DC and 76% of retail households had increases in wealth. Vanguard says DC investors had higher increases because most received ongoing employee and employer contributions. The data shows wealth generally climbed along with allocations to equities.
Millennials (88%) and Gen X (34%) experienced the highest increases in wealth over the three-year period, while the Silent Generation saw DC wealth decline 5% over the period. Vanguard explains that the youngest members of the Silent Generation were born in 1945 and, at the end of 2019, would have been 74 years old. It attributes the decline to required minimum distributions (RMDs) leaving DC accounts and those from traditional individual retirement accounts (IRAs) perhaps being invested in another taxable account.
The firm notes that Vanguard U.S. individual investors who tended to hold balanced portfolios experienced smaller wealth declines than the headline market statistics indicated.
“These figures suggest that investors should take a long view in thinking about market shocks and portfolio wealth. Widening the time frame can provide the psychological peace of mind necessary to avoid overreacting to short-term market declines, including those associated with the current pandemic,” the report concludes.
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