Whenever disaster strikes people run for safety. And when the stock market takes a sudden fall, they sell stocks and hide the money in cash.
That’s the move plenty of people have made since markets went wild this summer, and the turbulence has tested average investors’ ability to stick with their financial plans. It’s natural to flee in the face of danger, except that when it comes to investing, it’s usually the wrong one.
“The only person who gets injured on the roller coaster is the person who tries to jump off in the middle of the ride,” said Rob Austin, director of retirement research at Aon Hewitt, a human-resources consulting firm.
When worries about the global economy started shaking Wall Street last month, organizations that track average investors spotted a surge of money flowing out of the market and into cash. Average investors pulled a net $9.8 billion out of mutual funds targeting U.S. stocks and put $9 billion in the money market during the week ending Aug. 26, according to the Investment Company Institute, a trade group. This month, some of them seem to be taking their cues from the market’s weekly swings — money creeps into U.S. funds one week and gets pulled the next.
At the height of the tumult, Aon Hewitt noticed more workers were shuffling investments in their 401(k) plans. On Aug. 24, major stock indexes suffered their worst day in four years and “trading activity went through the roof,” Austin said. The number of trades jumped to seven times the daily average, as a rush of account holders sold stocks and tucked more money in cash. Two popular brokerages, Charles Schwab and E-Trade Financial, said trading in individual accounts set records that day.
Phones started ringing at financial-planning firms as clients called for help. Larry Ganzell, a 70-year old retiree in Carlsbad, California called his financial planning firm, Blankinship & Foster. Rick Brooks, the chief investment officer, helped settle his nerves. Brooks’ advice: Turn off the TV and stick to your long-term plan.
Financial planners frequently warn their clients against reacting to news reports and market swings. Fran Kinniry, a principal in Vanguard’s investment strategy group, said that people are susceptible to thinking that a sudden turn in the market implies something about the long-term. The turbulence that has knocked the S&P 500 down nearly 8 percent since May comes with the territory. It’s the risk that comes with the reward.