Author Topic: Neat Vanguard analysis of how clients that went to cash fared in the last 6 mont  (Read 1126 times)

Mr. Green

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https://www.marketwatch.com/amp/story/a-small-subset-of-vanguard-investors-moved-entirely-into-cash-when-the-market-tumbled-heres-how-they-did-2020-08-13

An alternative title for the thread could be, "Real examples why market timing doesn't pay" but it was interesting to see how barely more than half of those that went to cash outperformed the market when it was down significantly. I'm guessing anyone that sold to cash and maintained that position until the present is not very happy.

clarkfan1979

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I normally have 10% bonds. Once the United States seemed to stabilize, I got rid of the bonds (May 28th). As the S & P 500 is nearing a full recovery, I went back to 10% bonds yesterday. I currently have 60% large cap, 20% international, 10% small/mid cap and 10% bonds.

Over a 6 month timeline or 12 month timeline, my returns are around 10% higher than the S&P 500.

vand

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TBH I'm not sure that I consider panic-selling as a form of market timing; it's simply the abandonment of a strategy that in hindsight carried more risk than an investor's personal risk tolerance. I don't really see this as some massive vindication of passive investing.

As always there are two sides to every story, and I'd like to see an analysis of Vanguard investors who had some cash on the sidelines and put it to work in in March-April. Those savvy investors exist too.
« Last Edit: August 14, 2020, 10:51:37 AM by vand »

ysette9

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TBH I'm not sure that I consider panic-selling as a form of market timing; it's simply the abandonment of a strategy that in hindsight carried more risk than an investor's personal risk tolerance. I don't really see this as some massive vindication of passive investing.

As always there are two sides to every story, and I'd like to see an analysis of Vanguard investors who had some cash on the sidelines and put it to work in in March-April. Those savvy investors exist too.
Of course the right way to do it is to do nothing, then when things recover back to where they were before, adjust your asset allocation to better fit what your risk tolerance actually is. Panic selling at the bottom is clearly not the right way to react to the realization that you took on more risk than you should have.

I canít remember where I saw the analysis but I know o have read that overall the drag of having that cash on the sidelines outweighs the times you can get lucky and jump back on the roller coaster as it is starting to go up again.

MrThatsDifferent

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Well, I didnít quite do this as I didnít change my investments at all. But I did decide to stop contributing to my investments and keep my cash in a HISA so that I could possibly buy a place next year. It is nice to see the money in my investment account bounce back.

TempusFugit

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TBH I'm not sure that I consider panic-selling as a form of market timing; it's simply the abandonment of a strategy that in hindsight carried more risk than an investor's personal risk tolerance. I don't really see this as some massive vindication of passive investing.

As always there are two sides to every story, and I'd like to see an analysis of Vanguard investors who had some cash on the sidelines and put it to work in in March-April. Those savvy investors exist too.
Of course the right way to do it is to do nothing, then when things recover back to where they were before, adjust your asset allocation to better fit what your risk tolerance actually is. Panic selling at the bottom is clearly not the right way to react to the realization that you took on more risk than you should have.

I canít remember where I saw the analysis but I know o have read that overall the drag of having that cash on the sidelines outweighs the times you can get lucky and jump back on the roller coaster as it is starting to go up again.

We only call them 'savy investors' because sometimes it works out.  I held substantial cash reserves for a few years because I just knew that the market was long due for a big drop.  I was still contributing my max into tax deferred accounts, but I let the cash pile up in a regular old savings account paying nothing.  By the time I finally got myself to invest (most) of that cash into a combination of mortgage principal (probably not the ideal way to have spent that money, I know) and VTSAX/VBTLX, i calculated that I had incurred an opportunity cost of about $50K on that cash over 4 years.  Had the market dropped and had I been able to push that money in at lower valuations, it would have seemed like I was a savy investor, but really I would just have been a lucky investor. 

If I had that same cash right now sitting in a savings account, I doubt that I would be able to make myself invest it.  The market's seeming immunity to the economic reality is just bizarre to us mere mortals.  But that doesn't mean it can't sustain these levels or even go higher.  Sure, it will tank again eventually. But will that be next month, next year, or 5 years from now? Who knows?  Sitting on cash in this interest rate environment along with the inflationary pressures that classic economics tells us must be on the horizon due to all this helicopter money...there just isn't any logical or clear strategy one can employ.   

In the end all we can reasonably do is to follow the basic principals of sound investing.  Keep your investment costs as low as you can.  Time in the market is smarter than trying to time the market.  Pick an asset allocation that balances return with your own emotional constitution so that you can get through these huge market swings without doing anything rash, like going to all cash right before the market recovers from a huge drop.  Have enough in readily accessible assets that you can support yourself and your family during disruptions in the job market.  Hope for the best. 

MustacheAndaHalf

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Someone going 100% cash near a market panic is probably panicking, which is why I think Vanguard used that criteria.  They can't know why someone sold, so partial sales would be hard to categorize.  Did someone sell to make a down payment, or from fear?  Without context, Vanguard can't tell.

Unfortunately, that limits Vanguard's survey to just 1 in 200 accounts.  So it might tell how certain people - assumed to be panicking - performed.  But it's not a complete picture.

For example I market timed right at the start of the panic, but only sold part of my investments.  In case I was wrong, I wanted to keep 60% in passive index funds.  Anyone being prudent with their market timing might be in that same situation - not selling everything, and so not being included in Vanguard's study.