Buy High, Sell Low - Some Things Never Change

Here's a very interesting article from planadviser Magazine discussing how 401(k) assets in stable value reached an all-time high in November.  The article cites data from the Hewitt 401(k) Index.  Here's a few of the details:

  • "The Index for November shows stable value funds gained $342 million from participant transfers, and by the end of the month, the allocation to stable value was 33.4%, up from 20.5% just one year ago. Balanced and money market funds also received $61 million and $12 million in inflows, respectively, Hewitt said."
  • "Outflows mainly came from large U.S. equity, lifestyle, company stock, and international funds."
  • "On average, 401(k) participants transferred 0.06% of balances on a net daily basis in November (slightly above the trailing average of the past 12 months)"
  • "The direction of transfers was fixed income-oriented on 58% of the days in the month"
  • "The level of transfers was above normal four days of the month, with moneys moving toward fixed-income investments on all four days, each of which was immediately following large declines in the stock market."  (emphasis mine)

This is just more supporting evidence that the vast majority of participants do the wrong thing at the wrong time (usually because of emotion).  It's also the reason most participants earn sub par returns. You may be familiar with the study DALBAR releases each year that shows the 20-year return of the S&P 500 as compared to the average equity investor.  Every year it seems the average investor trails the index by roughly 7-8%!

There is no question that the past three months have been incredibly trying for every investor, whether novice or professional.  The velocity with which information flows in a globally connected world hasn't helped, especially when just about every newspaper, magazine, website or news station has contributed to doomsday scenarios.

I make no predictions about which direction the markets are going to go for the foreseeable future or whether we've already "hit the bottom" (and I wouldn't trust anyone who tells you they can predict the future).  However, consider this point:  November 20th represented the low point so far for the S&P 500 when it reached 752, having fallen 100 points in two days.  If you had invested in an an S&P 500 index fund on August 28th (when it closed at 1,300) you would have lost 42% of your money.

Presumably, one of the four days during the month where the level of transfers was above normal was on or around November 20th and those investors who transferred their money into stable value/fixed income locked in huge (and permanent) capital losses.  Many are likely to be nowhere near retirement and therefore had no immediate need to sell other than the emotional distress they were experiencing (pointing, in part, to a risk tolerance/time horizon problem). Assuming the market reverts to the mean and returns its historical average of approximately 10%, it would take those investors roughly 4 years to make their money back.  Interestingly, since November 20th the S&P has gained approximately 20%, despite a continued onslaught of bad news and significant volatility. How many of those people who went to cash do you think are still sitting there?  Probably most of them.

None of this is to say the market couldn't drop another 20% (or 30% or 40%) over the short-term - it could.  However, the market has corrected so severely that valuations are lower than they have been in many years and a growing number of experts expect returns to be very attractive moving forward.  I would fully expect that the successful investors of today will be the ones who, in the face of great concern and fear, moved money into "riskier" asset classes such as stocks rather than fixed income. 

I also fear most of those investors who are in "safe" investments like cash will remain there until the market has recovered substantially and will have missed the gains.  They will undoubtedly have an unsuccessful investment experience over time, earn sub par returns and probably have difficulty accumulating enough money to retire successfully.  As much as I hate to say it, the data continues to suggest that the closer participants get to making investment decisions the worse they will do.  Buy low, sell high might be the goal but the opposite seems to be the reality.