“If only I’d waited.” How many of us have whispered that phrase – in your mind – at some point in our lives? Although this phrase can cover many areas of life, when it pertains to planning and investing it is synonymous with a principle that is critical to the success or failure of your family’s long-term wealth accumulation. Patience. Or the lack there of.
When it relates to the markets, how patient are you? As the average retail investor, not very – according to DALBAR, Inc. The following charts* depict the typical responses of the average equity fund investor to a market change.
*Chart as of 1/13/2021
What has been found by DALBAR is that the average time frame for an investor to react to a market decline is about one month – yes, you are reading this correctly. This is the timeframe (or lack of patience) that the average investor displays before large amounts of withdrawals begin. Then, they become muted. Why one month? It has been revealed that the majority of investors will likely receive one of the following at the end of each month:
- Call from investment person to discuss investments
- Mailed Statement
- Electronic Statement
On the reverse, when the markets increase it takes about the same time frame – as money is added. If anyone wants the ideal strategy for life-long investment planning failure – this is it.
But wait there’s more.
The average investor may be saying to themselves, well what if this drop in the market becomes a crash and I lose my money. Isn’t this possible? Yes, possible but not probable. And planning for a successful retirement is primarily based on probabilities not possibilities. So, let’s look at the facts:
DALBAR has found that in the past thirty-five (35) years, the majority of declines were fully recovered in a short period of time. As shown in the chart below.
*Chart as of 1/13/2021
Actual testing by DALBAR from the S & P 500 from January 1984 to July 2020 (36.6 years) reveal that in 64.9% of the time – the full recovery is a month following the decline. In addition, in two months 76.4% of the time there was a full recovery and in three months – it gets even better. 85.2% of the time. This is what I meant by planning based on probabilities versus possibilities.
Unfortunately, by combining the two charts of how the average equity investors react to the market change (or lack of patience) – it has been a recipe of long-term underperformance. Let me walk you through it:
- Market Change Occurs (let’s say the drop happens)
- Around one month goes by and the average retail investor begins the largest withdrawal from their equity portfolio (first chart).
- Within that same month of massive withdrawals, the market begins to recover 64.9% of the time, then 76.4% followed by 85.2% over the three-month period (second chart).
- Resulting in the average equity investor selling near the lows of the temporary dip.
- As the market begins to recover, they typically begin to add back their allocation at higher prices. Hence buying back in at higher prices.
The average retail investors thoughts – “If only I’d Waited.”
The information is illustrative only and provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Past performance shown is not indicative of future results, which could differ substantially.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
DALBAR, Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. Launched in 1976, DALBAR has earned the recognition for consistent and unbiased evaluations of investment companies, registered investment advisers, insurance companies, broker/dealers, retirement plan providers and financial professionals. www.dalbar.com Report source- Learning from History. 2020
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The information contained above is for illustrative purposes only