How Vanguard investors are reacting to market volatility

Financial markets have faced a series of challenges this year: inflation hitting levels not seen in 40 years, the Federal Reserve embarking on what looks to be an aggressive rate-hiking cycle, and mounting fears of a recession.

In response, stocks tumbled, with the Standard & Poor’s 500 Index briefly entering bear market territory in May (meaning the market was down more than 20%) before recovering slightly. 

Our investment strategists looked at data on the trading habits of Vanguard’s 9.1 million self-directed investors from January 1 through May 23, 2022. It’s a big sample, representing $3 trillion in assets held by retail households and defined contribution plan participants.

“At the highest level, the results for that period underscore our longstanding finding that trading at Vanguard in response to volatile markets occurs among a small fraction of households,” said Senior Investment Strategist Jean Young. “In fact, there was a slowdown rather than an acceleration compared with recent years.” 

Our data showed that from the start of the year through May 23:

• 13.3% of households in the data set bought or sold securities (6.0% of plan participants and 19.4% of retail households). Fewer households traded compared with the same periods in the two previous years: 15.4% in 2021 and 13.9% in 2020.
• Among households that bought or sold securities, most did so very infrequently. Roughly two-thirds of those households made three or fewer trades. About 40% made only one trade. Of those investors who traded, about 7 of 10 moved into, not out of, equities.
• In terms of assets, households bought or sold the equivalent of 8.1% of the value of their holdings. That was lower than the comparable figures for three of the last four years: 10.7% in 2021, 12.8% in 2020, and 8.4% in 2018. 

Vanguard research on investor behavior titled Cash Panickers: Coronavirus Market Volatility underscored how, paradoxically, doing nothing can often be the best course of action.

The 2020 report looked at a small subset of Vanguard retail households and plan participants who abandoned equities for cash during the sharp market sell-off that began as the pandemic unfolded.

To assess how these so-called cash panickers fared, our investor research team calculated two return metrics. For the first, the researchers estimated the actual total returns that cash panickers realized between February 19 and May 31, 2020, a period that included a 34% fall in the S&P 500 Index and a subsequent 36% rise. For the second return metric, they calculated the “personal pre-pandemic benchmark” return for each cash panicker. That benchmark represents the return that would have been earned if the investor had not panicked and moved to cash (assuming they reinvested dividends).

As the chart illustrates, 86% of cash panickers locked in losses over the three-and-a-half-month period. Moreover, they missed out on the rebound, meaning nearly all of them ended up with actual returns that were lower than their personal pre-pandemic benchmark portfolio returns. 

“Investing can provoke strong emotions, especially during market downturns like the one we have just experienced,” Young said. “So it’s good for investors to keep in mind that sharp movements in the markets—whether up or down—are part of the investment cycle and not a call to action.”