Most People Don’t Sell Everything In a Panic

Speaking of not selling, I find this tidbit quite interesting: the vast majority don’t sell anyway.

Steve Utkus, Director of Center for Retirement Research at Vanguard, wrote in the Vanguard Blog that during the recent volatile days, between Aug. 1 and Aug. 10, only 2% of all 401(k) participants in plans administered by Vanguard made a change to their portfolios. During the volatile October 2008, only 4% made a move. The moves were of course not just one way. So the actual percentage of investors who sold stocks is even smaller.

It’s possible that Vanguard does a better job in educating the participants but it can’t be that much better. Allowing a 2-2.5x increase in the numbers, we are still talking about maximum 5-10% of people making changes to their portfolios in a panic.

Vanguard’s data are also consistent with data from Aon Hewitt 401(k) Index. Hewitt Associates also manages many 401(k) plans. Hewitt tracks the transfer activities of 1.5 million participants, which is a huge sample size. In October 2008, the transfers were way above average, but they still amounted to only 0.10% of assets per day or 2-3% for the month. The transfers were flowing out of stocks only on 57% of the days. On the other 43% of the days, the transfers went into stocks.

Vanguard’s data tracked number of people making transfers. Hewitt’s data tracked dollars transferred from one fund to another. They both show more or less the same result: the vast majority don’t sell in a panic.

Here’s another data point. The Investment Company Institute (ICI) is the trade group of all mutual fund companies in the U.S. It publishes data on money moving into and out of all mutual funds. It’s the source of all those “investors withdrew $X billion from stock mutual funds” articles in the news.

ICI reported that investors withdrew $252 billion from all stock mutual funds between July 2008 and March 2009. It’s a huge number. However, as of December 2008, the total assets in stock mutual funds were $3,744 billion. Only 7% of the money invested in stock mutual funds went out of stock mutual funds during a serious financial crisis. The vast majority of the money stayed put.

It makes you wonder just who are the intended audience for those “don’t sell” articles when the vast majority of people don’t sell anyway. Perhaps the “don’t sell” message already sank in and they are just preaching to the choir.

It also casts doubt on Dalbar’s story that most people sell low and buy high. Yes some people do that but they are a tiny minority. Most people have most of their money in retirement accounts and they set it and forget it. Not that all of them have great discipline but they just don’t pay as much attention to the market as the financial media want them to, let alone trade their accounts.

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  1. Matthew Amster-Burton says

    “It makes you wonder just who are the intended audience for those ‘don’t sell’ articles when the vast majority of people don’t sell anyway.”

    This strikes me as a fallacious argument. Let’s say 95% of people wear seat belts. Would it make sense to criticize a seat belt compliance campaign on the basis that most people already wear seat belts? I don’t think so.

    On the other hand, it would be perfectly reasonable to ask whether such a campaign would have any measurable effect.

    I know a guy who impoverished his retirement by selling in the midst of the 2008 crash (not at the bottom, but not far, either), moving to cash, and staying in cash ever since. Yes, this one anecdote proves nothing. But I wrote something of a don’t-sell column this week, and my goal was not to move the needle further into the black but to reach that one guy before he does something stupid. Probably a futile effort.

    And, of course, that was Steve Utkus’s goal, too. His column was clearly a version of those “85% of students on your campus don’t binge-drink” campaigns.

  2. Money Beagle says

    I agree. I think very few people are cashing out their 401(k)s on a given day. The ones panicking are the people on Wall Street, the institutional investors. They are the ones that need to watch TV and hear the ‘don’t panic’ message, not the Joes & Janes of the world who are too busy actually working to be worrying about panic selling.

  3. Harry Sit says

    Matthew – I only wish the articles make it clear selling in a panic is not a normal occurrence. 95% or 99% of the people don’t do it. It wasn’t clear to me until I read Steve’s article. When people know they are in the tiny minority, perhaps they will think twice before doing it. The other articles leave me with the impression that selling is natural and most others are doing it.

    Same with a “wear your seat belt” campaign. If it doesn’t convey the message 99% of people already wear the seat belt and you’d be stupid if you don’t but it leaves the impression that not wearing one is the default and a popular behavior, then the campaign isn’t a success.

  4. Sammy_M says

    Makes me think of some of the materials I’ve read that suggest the most effective way to motivate people is to point out that everyone else is already doing it. Or, in this case, not doing it.

    I also wonder how many people do not sell during a crash but shortly thereafter. In other words, they wait for the rebound, but if it doesn’t happen quickly they get frustrated and leave.

  5. Harry Sit says

    @Sammy_M – Here’s another headline: Investors flee stock funds at rate not seen since 2008 panic. Sounds like a popular thing to do! Only when you take the time to read the article, you get to know that the outflow was 0.5% of the assets.

    ICI reports mutual fund flows. Total outflows from all equity funds between July 2008 and March 2009 were $250 billion. Taking the $6 trillion total assets number from the USA Today article, that’s 4% of the assets.

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