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Pandemic fears fueled emotional investment decisions

December 09, 2020

Chart showing top financial concerns among U.S. adults

We’re less than a month away from the end of an incredibly tumultuous year. While most people are ready to put 2020 in the rearview mirror, the stress and anxiety that investors experienced over the past nine months will likely remain front and center in the new year.

From an investment perspective, heightened emotions were reflected not only in spikes of volatility throughout the year but also in fund flows. Investors on a “flight to liquidity” in the spring sparked massive selling across nearly all risk assets. One survey showed that 18% of investors sold the entirety of their equity holdings between February and May, including nearly one-third of investors over the age of 65.

But as markets rapidly recovered, investors on the sidelines were whipsawed and have only recently returned to stocks, just as markets have reached record highs. Global equity funds attracted a record $115 billion in the last four weeks. That’s a clear reminder not only of the penalty for trading on emotion, but the price investors pay for trying to time the market as the chart on the following page illustrates.

graph showing the growth of $10000 invested in the S&P 500 Index

A July 2020 survey of financial concerns among U.S. adults reveals the fear that drove this emotional behavior. Topping the list of concerns was “performance or stability of my investments,” accounting for 35% of survey respondents. Despite high unemployment and economic uncertainty, investment worries eclipsed concerns about the ability to cover day-to-day expenses and pay rent. This survey reflects the stress that investors place on their portfolios and is a key factor in the tendency to buy and sell on emotion.

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