We all know that inertia and procrastination are important behavioral biases and that they can undermine good long-term decisions. It’s easy to put off rewriting your will, exercising, dieting or, in the financial world, to put off saving more or rebalancing your portfolio. I should know—a lawyer suggested I update my will and related documents a year ago. Just last week, I replied to his email.
But procrastination and inertia can also be benign. A case in point is investor reaction to recent global stock market volatility. During the latter part of August, a slowdown in economic growth in China led to a sharp increase in stock market volatility in China and around the world.
It’s true that in these market conditions, some individual investors made portfolio changes. But the headlines reporting investor panic were broadly wrong. The fact remains that despite the surge in activity among some investors, the overwhelming majority made no portfolio changes in choppy markets. They stayed put and let inertia rule.
The accompanying chart tells a more complete story.* It compares trading volume (namely money movement between investment options) for Vanguard defined contribution (DC) plan participants over several periods, including one of the worst market days during the global financial crisis, the period of volatility during the federal debt showdown of 2011, and a volatile August 2015 in relation to China. The chart also includes a measure of trading during a relatively normal period (June to August 2015, excluding the days of the global market sell-off).
You can see the jump in trading activity in volatile markets. Each volatile period is higher than the reference period. But it’s also worth noting the scale of the changes. For example, on August 24 of this year, 0.37% of all Vanguard DC plan participants made an exchange—relative to a normal number of participants of one-tenth of 1%. That means the surge in trading was the result of an additional one-fourth of 1% of DC plan investors moving money. To put it another way, if you add up all of the people who traded during the week surrounding the China market crisis and subtract the ordinary level of trading, about one-half of 1% of people chose to make a move in response to the crisis.
So, the next time you read about investor reaction to volatile market conditions, take it with a grain of salt. Yes, there are more people trading, and their buying and selling choices obviously are part of the market flows that influence changes in stock prices. But the fact remains that an overwhelming number of investors sit patiently on the sidelines, letting inertia exert a beneficial influence.
* My thanks to Vanguard crew member Jeff Clark for creating this and other analyses related to China market volatility.
- All investing is subject to risk, including the possible loss of the money you invest.