Human beings respond to danger. For some, the natural instinct is to run, while others prefer to fight back. When it comes to the market, investors would do well to fight that innate reaction. It seems, for the most part, that they have.
This new paper from Vanguard “Fund industry’s asset mix offers encouraging sign” shows that the volatility of investors mix of stocks bonds and cash has come way down over the years.
Why have investors been less likely to respond to adverse market conditions. Surely there are many factors at play here, but according to Vanguard:
The team’s hypothesis is that industrywide changes in the delivery of investment advice and in the investment funds themselves account for the improved results, he says. Those include the widespread shift to fee-based (rather than commission-based) financial advice, the related, surging popularity of ETFs and model portfolios, and the dominance of target-date funds (TDFs) in employer-sponsored retirement plans.
The behavior gap is based on a simple idea that investors tend to underperform their own investments by buying and selling at the wrong time. It seems like this behavior isn’t as pervasive as it had been in the past. When markets got volatile, Jack Bogle would say to investors, “Don’t just do something. Sit there.”
It seems like they’re getting the message.
Discussion about this post