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Emotional investors fall behind the market

September 29, 2020

Annualized returns, 2009 - 2019 chart

Equity markets have been remarkably resilient so far this year. Despite unprecedented uncertainty, the S&P 500® Index is positive for the year-to-date through September 25 and up by double-digits over the past 12 months. The 7% decline in September from the stock market’s recent record highs has severely damaged investor confidence, with data on sentiment and fund flows collapsing.

In periods of stress and uncertainty, investors tend to want to “do something,” which often leads to the panicked selling we saw in March, and occasionally the panicked buying we saw in certain segments of the market in August. A recent Fidelity Investment survey showed that 18% of investors sold all their equity holdings between March and May of this year. Nearly one-quarter of those sellers were above 65 years old.

A recent DALBAR survey shows the price emotional investors pay in lagging performance. Over the past 10 years (2009-2019), the average equity investor under-performed the S&P 500 by more than 4% per year, while the average bond investor under-performed the Barclays Aggregate Bond Index by more than 3% (see chart above). More to the point, the average bond investor couldn’t even beat the rate of inflation during this time. The performance lag is largely due to the difficulty investors face when trying to time the market and the penalty they incur from trading on emotion. As the election draws near, and its accompanying noise reaches historic levels, market volatility and investor anxiety will likely rise. Investors will need to temper their emotions and remain disciplined to navigate through the coming period of market stress.

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