Few investors decided to ride out the March 2020 stock market swoon; just 26% of 1,000 randomly selected investors reported that they did nothing amid the rout, according to DALBAR’s 2021 Quantitative Analysis of Investor Behavior report
When financial markets went haywire in March 2020, people pursuing a traditional financial plan may have been tempted to do something – anything – rather than let their dreams evaporate. The plunge and quick rebound to new stock market highs provides a clear example of why Horizon Investments believes the right course of action is to build a goals-based financial plan focused on staying on track to reach your objectives rather than paying attention to the stock market’s roller-coaster ride.
New data suggest many people in March of last year were unable to avoid emotion-driven trading. Among those surveyed by DALBAR Inc. for its recently released 2021 Quantitative Analysis of Investor Behavior report,1 15% of investors cashed out while 30% reallocated assets. 26% of respondents said they did nothing, and the remainder invested more.
A key component of goals-based financial planning is to conquer emotional decisions by focusing people on what they’re saving and investing for; that can help tamp down the urge to trade which can damage long-term returns.
March 2020 highlighted three important investing ideas for people who are on a goals-based journey:
- It’s a good idea to discuss with your advisor ahead of time how to react to the inevitable
gyrations in markets and then stick to those decisions.
- The market’s movements are impossible to predict – and so there’s no way to reliably pick
tops and bottoms in prices. In other words, we believe market timing is a poor investment
- If fear and emotion drive someone to sell stocks during a market swoon and then they
have to decide when to get back in, that could leave them further away from reaching their
goal than if they had done nothing.
New research on investor behavior demonstrates the value of filtering out short-term market noise, especially if your goal lies far in the future. Researchers showed people short- and long-term stock market charts to see if the different time frames affected their behavior. They found that “investors exhibit significantly higher trading volume if they view short-term as opposed to long-term price charts. Consequently, they also pay substantially higher trading fees which results in lower average net returns.”
Real-world data supports the researchers’ findings. The underperformance of the average equity-fund investor versus the S&P 500 index – likely due to trading and poor timing – amounts to 4.5% over the last 30 years, according to DALBAR.1
A maxim of goals-based planning is that focusing on short-term market movements can be dangerous to your long-term financial health. Horizon Investments considers that maxim in all of the investment strategies we’ve built. Because we believe what truly matters at the end of a goals-based journey is being able to live life on your terms. Learn how Horizon Investments tackles the challenge of managing emotion-driven behavior by visiting protect.horizoninvestments.com.
1 Quantitative Analysis of Investor Behavior (QAIB), 2021, DALBAR, Inc. www.dalbarinc.com
2 Borsboom, Charlotte and Janssen, Dirk-Jan and Strucks, Markus and Zeisberger, Stefan, “History Matters: How Short-Term Price Charts Hurt Investment Performance” (March 23, 2021, Social Science Research Network ID 3722819)
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Originally published by Horizon Investments
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