According to Dalbar’s 2015 Quantitative Analysis of Investor Behavior (QAIB), the worst gap between market and investor performance in the past 30 years was in October 2008 when, as the report states, the S&P 500 index lost 16.8% but investors lost a little over 24%.
There are, of course, many psychological factors that explain the disparity: behavioral finance biases that model why investors act irrationally. However, to be able to anticipate this behavior, and to help coach and develop clients to behave in ways that are conducive to building wealth, examining past behaviors may be the most telling.
In our recent Financial Behaviors and Wealth Potential report, we examined how the propensity to build wealth, or Wealth Potential, impacted investment-related decisions during a down market.
We asked investors (n = 377) to indicate what action they took in relationship to the downturn of the market in September 2015. Specifically, we were looking to see how those investors who were categorized as having a high propensity for building wealth over time, based on their past behaviors and experiences, would differ in terms of stock market investing.
Over 70% of the sample took no action, and 5% took money out of the market. However, nearly a quarter of respondents (24%) indicated putting money into the market during the downturn. In fact, 31% of the high potential group, and 26% of the medium potential group indicated putting money into the market during the downturn, while only 10% of low potential respondents did so. These actions indicate a significant difference between the Wealth Potential groups.
By accurately measuring predictive financial behaviors, firms and advisors can anticipate the specific investing behaviors and reactions of their clients. A confident, but not overconfident, investor who takes responsibility for financial outcomes, who can ignore trends, and is generally frugal, is more likely to invest when the market declines.