Author Topic: Who Panics in a Market Downturn?  (Read 23008 times)

Jeremy

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Who Panics in a Market Downturn?
« on: March 19, 2015, 02:32:28 AM »
Has anybody come across a good data source for a review of panic in a market downturn?

What percentage of people "panicked" in 2000 or 2008?
Of that group, how many were retired?
Of that subgroup, how many had an asset allocation of 70-100% stock? (did asset allocation make a difference?)
Etc...



In my own situation, I didn't panic in 2000. 
When the planes hit the towers in 2001, I put every penny into the market as soon as they reopened
In 2008, I kept buying all the way down.  I lost over $400k that year and didn't worry about it a bit
In Oct 2014, apparently the S&P500 dropped 10%+.  I just learned this now because I just now looked (I don't watch TV, and seldom look at the market)

Am I a freak?  Or am I guaranteed by human nature to panic in the future and destroy all hope of feeding my family unless I get a job?



Certainly people have panicked in the past.  There are good stories about people jumping from buildings in 1929, etc...

Is this reason to say with 100% confidence that everybody panics?  Or are these exceptions?

It seems a lot like telling somebody that just got engaged, "Don't do it dude!  You are guaranteed to cheat on her and then you'll get divorced!  It's human nature, everyone does it eventually"

Certainly some people cheat, and some are serial divorcees.  But others have happy lifelong monogamous relationships


What does the data say?

johnny847

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Re: Who Panics in a Market Downturn?
« Reply #1 on: March 19, 2015, 03:14:36 AM »
I did some quick searches, wasn't able to find anything. I'm curious if anybody has any data on this!

market timer

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Re: Who Panics in a Market Downturn?
« Reply #2 on: March 19, 2015, 03:24:50 AM »
There is quite a bit of research on this topic. Google (or Google Scholar) "mutual fund flows vs returns."

Corporations also panic, in a sense, by reducing share buyback programs at the worst possible times.


PEIslander

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Re: Who Panics in a Market Downturn?
« Reply #3 on: March 19, 2015, 03:52:37 AM »
Most people who sell on a sudden market downturn probably wouldn't characterize it as 'panic' selling. To them it seems like a totally rational response to current conditions. No doubt many of the early sellers saved themselves even bigger loses. If they timed their return to the markets appropriately (of course that's the hard part) they would have done far better than those who just stayed invested. Sometimes we buy-n-hold investors forget that market timing works -- if the timing is right. That isn't to say it's a good strategy because, as most of us here realize, timing the market effectively is practically impossible.

Jeremy

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Re: Who Panics in a Market Downturn?
« Reply #4 on: March 19, 2015, 05:34:14 AM »
There is quite a bit of research on this topic. Google (or Google Scholar) "mutual fund flows vs returns."

Corporations also panic, in a sense, by reducing share buyback programs at the worst possible times.


I've dug into this before and was never satisfied with the level of detail

The corporation side seems rational, their fiduciary responsibility is to grow their business.  If future cash flow is at risk, reducing spending would be wise.  It's much like our own plan to spend less in a severe downturn


Just looking straight up at market outflows in the 2008 downturn, it looks like roughly 650 billion flowed out of funds in the 8 quarters around the end of 2008.  Market value around that time dropped from 14 trillion to 8 trillion, so outflow was roughly 5-8% of total assets

http://www.businessinsider.com/blackrock-sp-500-vs-equity-fund-flow-2013-4
http://www.gurufocus.com/stock-market-valuations.php


It doesn't say anything about the source of outflows, which is what I'm curious about?  Was this all individual investors that were breaking their target asset allocation?


h2ogal

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Re: Who Panics in a Market Downturn?
« Reply #5 on: March 19, 2015, 05:40:54 AM »
In 2009 I didn't panic and was able to buy a lot. In 2001 however I changed jobs and was forced to sell some vested stock awards during a downturn.  I think the thing to remember is that not everyone who sells at the bottom is panicking.   Sometimes life just happens


2Birds1Stone

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Re: Who Panics in a Market Downturn?
« Reply #7 on: March 19, 2015, 06:16:57 AM »
I would be very interested to see the data as well.

I think those of us like myself who are fairly new to investing, have yet to really see how what our true risk tolerance is. Its great to say in theory that we could ignore a 20-50% drop in our portfolio's without losing sleep at night, the reality might be very different.

This is a topic that I have read about many times on the Bogleheads forums.

Take this board for example, The vast majority of us have only had skin in the game for maybe 5 years. Many have started investing in the past 2-3 years since MMM was discovered. We have enjoyed some exceptionally amazing returns, what would the tone of voice be on the forums and the blog if over the past 3 years those returns were negative to the same magnitude?

Retire-Canada

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Re: Who Panics in a Market Downturn?
« Reply #8 on: March 19, 2015, 06:40:00 AM »

What does the data say?

I'm no expert.

I was reading about the 2008 crisis a few days ago and the article suggested automatic stop loss orders were a part of the problem. People set rationale limits for specific investments and then lost control when the whole market dropped which was potentially a different scenario than what they imagined when setting a stop loss order on a specific investment thinking "if X drops to Y I should get out".

I was in investor highschool back in 2008. I didn't panic and take my $$ out, but I also didn't put more money in. In fact I paid cash for a new motorcycle because I was so bummed about my losses in the market and it seemed like a more reliable place to put my money.

I'd be FIRE now if I had dumped all my available liquidity in the market in 2008.

Live and learn. I'm in 2nd year investor university now so I'll know what to do next time.

-- Vik

Mississippi Mudstache

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Re: Who Panics in a Market Downturn?
« Reply #9 on: March 19, 2015, 07:19:06 AM »
In Oct 2014, apparently the S&P500 dropped 10%+.  I just learned this now because I just now looked (I don't watch TV, and seldom look at the market)

This is news to me as well. I guess it explains why I seemed to hover just below the $100,000 mark for a couple months last fall, before surging past $120,000 in a couple weeks.

brooklynguy

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Re: Who Panics in a Market Downturn?
« Reply #10 on: March 19, 2015, 07:25:51 AM »
It's a good question, but I don't think the answer is all that important.  It matters not what most investors do, or what most similarly situated investors do, but what you do.

I'm one of the biggest proponents on this forum for a 100% equity allocation for sufficiently long time horizons, but I usually try to temper that advice by being clear that it requires an iron stomach (and for those of us who haven't been tested in an actual market crash, many have weaker stomachs than they like to imagine).

This recent thread was aimed at giving folks a flavor of the psychological experience of living through a market crash to help begin to judge their own true risk tolerance:

http://forum.mrmoneymustache.com/investor-alley/what-does-100-equities-feel-like/

DrF

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Re: Who Panics in a Market Downturn?
« Reply #11 on: March 19, 2015, 07:37:59 AM »
There is quite a bit of research on this topic. Google (or Google Scholar) "mutual fund flows vs returns."

Corporations also panic, in a sense, by reducing share buyback programs at the worst possible times.



Buffett has said before that corporations tend to do buybacks during the peak because they have extra cash and shareholders/directors yelling at them to do something with the money. As MT's graph shows, they are buying high nearly every time.

691175002

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Re: Who Panics in a Market Downturn?
« Reply #12 on: March 19, 2015, 07:50:10 AM »
I worked retail a few semesters in school and that kind of behavior is fairly common.  Its hard to put a true percentage on it since any set of clients will be a biased sample of the real population.

Most aren't framing it as a panic sell, more of a tactical move.  They see the market trending down and think it will continue in that direction.  In that situation it can be perfectly rational to exit the market.  Occasionally you get real panic where they simply do not want to see their holdings decline any further and will sell at any cost.


In my opinion the most dangerous form of capitulation is a permanent shift in asset allocation.  For example in 08 you had a lot of people ride aggressive holdings on the way down, realize their portfolio was too volatile and then switch to large cap dividend payers for the next five years.

Sophisticated investors find it easier to justify that kind of behavior and tend to hold on longer before giving up, making it all the more painful.  It is generally not recognized as a mistake either, since they didn't actually sell, just "reduced risk" or "limited the downside".

When you see pros drop their small cap allocation or move to 20% cash, the bottom is near.

I'm not saying that it is wrong to make your portfolio more conservative, but don't let it mask what is actually a capitulation.


TL;DR Genuine panic selling is generally rare, most poor decisions are framed as tactical moves that can be later rationalized as good decisions (even if they clearly weren't).

wtjbatman

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Re: Who Panics in a Market Downturn?
« Reply #13 on: March 19, 2015, 08:34:29 AM »
Buffett has said before that corporations tend to do buybacks during the peak because they have extra cash and shareholders/directors yelling at them to do something with the money. As MT's graph shows, they are buying high nearly every time.

I've been reading about how over the last 10 years large hedge funds have started forcing share buybacks and performing pump and dumps, even of big corporations. Looking at the chart, it does seem like there has been an increase in share buybacks since around 2004.

Recent example: GM plans $5B stock buyback, averts showdown with hedge funds

brooklynguy

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Re: Who Panics in a Market Downturn?
« Reply #14 on: March 19, 2015, 08:46:37 AM »
In Oct 2014, apparently the S&P500 dropped 10%+.  I just learned this now because I just now looked (I don't watch TV, and seldom look at the market)

This is news to me as well. I guess it explains why I seemed to hover just below the $100,000 mark for a couple months last fall, before surging past $120,000 in a couple weeks.

Google Finance tells me the drop was actually closer to 7.5% than 10% (from the previous absolute market high), but that doesn't really change Jeremy's point.

Mississippi Mudstache

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Re: Who Panics in a Market Downturn?
« Reply #15 on: March 19, 2015, 09:06:08 AM »
I looked up the chart and saw the 7.5% dip as well, but assumed it may have been an intra-day dip? I didn't investigate further, since it doesn't matter anyway.

Numbers Man

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Re: Who Panics in a Market Downturn?
« Reply #16 on: March 19, 2015, 09:17:09 AM »
Who panics? The Hedge Fund Managers.

jmusic

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Re: Who Panics in a Market Downturn?
« Reply #17 on: March 19, 2015, 09:45:44 AM »
Who panics? The Hedge Fund Managers.

Oh nay nay.  The Hedge fund managers are the ones who move the markets, and sucker the "weaker hands" of smaller players and retail investors into selling.  When the prices get cheap, they buy it back up and do it all over again.

In fact, retail investors are so often wrong that their market commitments are generally viewed as a contrarian indicator.

sirdoug007

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Re: Who Panics in a Market Downturn?
« Reply #18 on: March 19, 2015, 10:11:07 AM »
Barry Ritholtz hits the nail on the head with his response to the Blackrock chart: http://www.businessinsider.com/blackrock-sp-500-vs-equity-fund-flow-2013-4#ixzz3UqeslDrP

"Yes people buy and sell at the wrong time —but that's HOW tops and bottoms occur.  You could not get those lows WITHOUT lots of sellers dumping stocks at once.  People respond to prices, and those prices respond to what people are doing,"

The answer is everyone does.  That is HOW the drop occurs.  If everyone were buy and hold investors, there would be very little volatility in the market.

The market drops because the market participants gets scared and lower the price they are willing to pay for the companies that make up the market.

It would be interesting if there were a corner of the market that did not participate in selling during these scares, but by definition, it would have to be a small corner.



Numbers Man

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Re: Who Panics in a Market Downturn?
« Reply #19 on: March 19, 2015, 10:25:21 AM »
Who panics? The Hedge Fund Managers.

Oh nay nay.  The Hedge fund managers are the ones who move the markets, and sucker the "weaker hands" of smaller players and retail investors into selling.  When the prices get cheap, they buy it back up and do it all over again.

In fact, retail investors are so often wrong that their market commitments are generally viewed as a contrarian indicator.
Joe retail investor's little bit of dough is nothing compared to what the Hedge Fund Managers have. Big volume equals big price movement.

fb132

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Re: Who Panics in a Market Downturn?
« Reply #20 on: March 19, 2015, 10:38:45 AM »
Well I am still young (32), I regulary invest every week so I don't really worry about it. I began investing in 2008, I came at the right time as the stock market was at its lowest point and now my investments are doing great. But the next crash won't affect how I sleep at night, it is money that I will be using in 20-25 years. When it's down, I see it as a rebate on stocks.
« Last Edit: March 19, 2015, 07:28:34 PM by fb132 »

skyrefuge

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Re: Who Panics in a Market Downturn?
« Reply #21 on: March 19, 2015, 10:50:07 AM »
Adding to sirdoug007's post, DALBAR's Quantitative Analysis of Investor Behavior (pdf) is a more-detailed look at how "the average investor" times his decisions poorly, and thus, greatly underperforms the market.

It does not isolate the effects of "panic selling" as distinct from "buying high" (though in principle I think that it could), but its bigger shortcoming is that, due to its methodology, it cannot do a granular segmentation of investors and tell you how "investors just like you" have behaved in the past.

It comes closest when it analyzes the "retention rates" of equity fund investors vs. "asset allocation" fund investors. It doesn't define "asset allocation" fund, but I assume it means any fund that is a mix of stocks and bonds. It finds that "asset allocation" investors hold their funds longer than pure-equity fund investors or pure-fixed income fund investors, suggesting that an asset mix helps encourage a buy-and-hold strategy:

"In 2013, as in years past, asset allocation fund investors have remained invested in their respective funds longer than equity or fixed income investors. Higher retention rates are evidence that behavioral factors are muted when investors are invested in as set allocation funds. Investors’ expectations when investing in asset allocation funds may explain why they stay invested longer. Asset allocation investors do not expect their funds to perform as well as an equity fund or preserve capital as well as a fixed income fund. They are also less likely to see dramatic price swings that tempt buying and selling. Overall, the average asset allocation mutual fund investor has stayed invested in their funds over a year longer than equity and fixed income mutual fund investors."

Average Mutual Fund Retention Rates (based on 20-year analysis)
Equity: 3.33 years
Fixed-Income: 3.05 years
Asset Allocation: 4.53 years

It would be nice to see a more-detailed breakdown there, segmenting "asset allocation" into 90/10, 75/25, 50/50, etc. groupings.

So it seems like a bottom-up analysis of large numbers of individual investors (as 691175002 provided in a qualitative way) is the only way to get at what you're really looking for (as opposed to the DALBAR method that uses a top-down analysis of fund flows). Vanguard does some pretty extensive reporting on its clients results/behaviors; I'm not sure if they've directly analyzed this question, but mutual fund providers (who have access to individual-investor data) are probably the most-likely source to have valuable data in this area.

Good thread, and I agree some actual data here would be very informative and useful!

Kaspian

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Re: Who Panics in a Market Downturn?
« Reply #22 on: March 19, 2015, 11:20:58 AM »
It's going to be very interesting to see what happens next time there's a major downturn.  Lots of new investors out there haven't yet experienced a financial trial-by-fire.  One's self-evaluation for risk is often exaggerated.  What is it, something like 75% of people think they're a better-than-average driver? 

neo von retorch

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Re: Who Panics in a Market Downturn?
« Reply #23 on: March 19, 2015, 11:33:49 AM »
This is news to me as well. I guess it explains why I seemed to hover just below the $100,000 mark for a couple months last fall, before surging past $120,000 in a couple weeks.

Not news to me, but... almost exactly the same numbers as I witnessed during that time period. Samesies!

Candace

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Re: Who Panics in a Market Downturn?
« Reply #24 on: March 19, 2015, 11:35:27 AM »
Who cares who panics, as long as you don't? And by not panicking, I mean not selling, even if you explain (rationalize) it as a tactical move.

I've been 100% in stocks since 1984 (except for my home equity) and haven't sold anything except when I wanted the proceeds for a life goal-related purchase or expense. I watch the news, but just don't flinch. I'm taking the long view. When I get close to FI, like within a year or two, I might reallocate a bit. But until then I plan to be in stocks and to cover my ears and hum when there's a downturn. It's worked well so far.

sirdoug007

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Re: Who Panics in a Market Downturn?
« Reply #25 on: March 19, 2015, 11:38:08 AM »
Here's a great article describing why most stock market investors MUST receive inferior returns.

http://www.fool.com/investing/general/2014/05/16/some-of-you-must-fail.aspx

"All investors I know say they'll be greedy when others are fearful. They never assume that they, themselves, will be the fearful ones. But someone has to be, by definition. With stocks at all-time highs, few people will tell you, "If my portfolio falls 20%, I'm going to panic sell and cash out." They're more likely to say that a 20% decline would be a buying opportunity. This is the right attitude, but the reason there will be a 20% crash is specifically because investors choose panic selling over opportunistic buying. My experience is that most investors who say they'll be greedy when others are fearful soon realize that they are the "others." It has to be this way: When everyone thinks they're a contrarian, at least half will be wrong."

Kaspian

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Re: Who Panics in a Market Downturn?
« Reply #26 on: March 19, 2015, 11:48:25 AM »
Here's a great article describing why most stock market investors MUST receive inferior returns.

http://www.fool.com/investing/general/2014/05/16/some-of-you-must-fail.aspx

"All investors I know say they'll be greedy when others are fearful. They never assume that they, themselves, will be the fearful ones. But someone has to be, by definition. With stocks at all-time highs, few people will tell you, "If my portfolio falls 20%, I'm going to panic sell and cash out." They're more likely to say that a 20% decline would be a buying opportunity. This is the right attitude, but the reason there will be a 20% crash is specifically because investors choose panic selling over opportunistic buying. My experience is that most investors who say they'll be greedy when others are fearful soon realize that they are the "others." It has to be this way: When everyone thinks they're a contrarian, at least half will be wrong."

Well put!!  We also have to remember that even though we've been in a bull market for years, there are always half the people thinking the opposite.  We keep shoving money in to buy, but out there somewhere is a person who's selling it and betting against your prediction.

johnny847

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Re: Who Panics in a Market Downturn?
« Reply #27 on: March 19, 2015, 12:48:01 PM »
Who cares who panics, as long as you don't? And by not panicking, I mean not selling, even if you explain (rationalize) it as a tactical move.

Because while the best advice for asset allocation is a high percentage of stocks, and don't panic during a market downturn, some people give advice assuming that the vast majority of people will panic.

Example from Rick Ferri (he's a well respected Boglehead) http://www.rickferri.com/blog/strategy/the-flight-path-approach-to-age-based-asset-allocation/
Quote
Asset allocation models based on an investor’s age tend to be inherently flawed. They state that young people should be heavy in stocks and old people heavy in bonds. The idea sounds passable, but it doesn’t fit how many people actually act or what they may need.
Age-based models assume all young investors have a high risk tolerance and can emotionally handle bear markets. They also assume retirees should continually reduce equity exposure the longer they’re in retirement. I don’t support either assumption.
The ability of young people to handle high levels of equity is a fallacy. It may be technically correct based on long-term returns, but not on short-term emotion. Many young people have far less appetite for equity risk than the age-based model assumes. This is because they’re inexperienced at taking risk and this often leads to capitulation during a bear market.

So the question is, is this actually sound advice? Do the statistics say that people panic during a market downturn? (Or in this case, do the statistics say that young people panic more often than older people during a market downturn?). Rick Ferri doesn't cite any statistics on the matter.

Abe

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Re: Who Panics in a Market Downturn?
« Reply #28 on: March 19, 2015, 02:13:25 PM »
I think it doesn't depend on absolute age, but age close to when you will be relying on those savings. For example, my wife and I are at the beginning of our careers, the amount we spend is a fraction of one of our salaries, and the amount we have saved right now is only about 2x our current annual salaries. If there was another 40% crash, it wouldn't matter since our annual savings are a large fraction of net worth; we could "re-build" fairly quickly. Similarly, if we fast-forward 25 years and our annual returns from the investments are again several times our annual spending, another crash really won't affect us much either. It would take longer to "re-build" since we won't have any job income, but it doesn't affect us in the short term anyway. The biggest effect would be in the years before retirement where the savings aren't large enough to weather years-long drops, but our time left to re-build is less. Maybe it makes sense to temporarily divert some savings to bonds during this time for a cushion, throw the rest at equities regardless of the market status, and once you are in the retirement-ridiculous-amount-of-savings phase of life, switch back to all equities again?

PathtoFIRE

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Re: Who Panics in a Market Downturn?
« Reply #29 on: March 19, 2015, 02:16:19 PM »
While I don't have any data to back up my statements, I think the overall picture is very complex, and that the image of an individual investor selling low in a panic probably only accounts for a fraction of the overall "loss" that all investors as an aggregate see versus the indices. I would guess as likely or more, at least for the individual based on reading various forums and such, is the situation where someone arranges their financial circumstances in such a way that they are forced to sell, for example lacking an emergency fund or similar mechanism, and then losing their job or revenue, and then having to sell off part of their 401k or IRAs.

I've always just assumed that many of the sellers during large downturns are probably institutional investors (banks, funds, endowments, pensions, companies) who have multiple and competing mandates and short-term needs. I didn't come up with this idea (although I can't remember where I read it to give credit), but I've seen where people have tried to hash out the disadvantages and advantages that the individual investor has in the market, and while many of the disadvantages are well-detailed in posts and topics about market-timing and individual security selection, one of the advantages mentioned which hit home for me is the ability to play the long game in a field when so many giant institutional investors are essentially forced to make short-term decisions contrary to positive long-term outcomes.

While I admit that I have not been fully tested during a significant market downturn (I had 401ks and 457bs during 2008-2009, but had just started, the amounts were small, and I was completely oblivious as I was engrossed in my training program at the time), my worry personally is for the flip side, the tendency I see in myself to chase after to newest, shiniest investment technique or strategy (like dual momentum or leveraged indices now). Buying at the top isn't all that bad (if you refuse to sell at the bottom), but you combine that with switching strategies, so that you are always chasing yield and ending up with poor performance because you are always picking LAST year's winner, and that could be equally devastating to long-term portfolio growth.

skyrefuge

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Re: Who Panics in a Market Downturn?
« Reply #30 on: March 19, 2015, 06:23:05 PM »
What percentage of people "panicked" in 2000 or 2008?

Ok, I think I have a solid answer for at least this question.

https://pressroom.vanguard.com/content/nonindexed/How_America_Saves_2010.pdf analyzes the behavior of its defined contribution plan (401(k)) participants. From p. 62:

Between September 2007 and December 2009:

3% completely abandoned equities
5% decreased their equity allocation by 10 or more points

76% stayed their course

3% increased their equity allocation by 10 or more points
1% went to 100% equities

So while some clearly "panicked" (3%), and some "adjusted" in harmful ways (5%), this was partly balanced out by people who went the other way.

And a great majority of the participants did nothing. Now, surely a large part of this non-action was due to people who have no understanding or interest in their 401(k)s, so among "aware investors" the percentage who changed allocations would be greater. But it's reasonable to assume that the numbers of those who sell their equities in a crash are only about twice that of those who do the opposite and dive in.

The 2014 version of the same publication (pdf) has an interesting chart on p. 77. In the 10-year period from 2004-2013, the month where the most money was shifted out of equities was October 2008 (when the market had its steepest fall in forever). Not surprising, and what the "investors panic" narrative tells us. But what was the month when the most money was shifted into equities? The very same month, October 2008! On net, the shift that month was still heavily away from equities, but it shows that there were still plenty of "contrarians" doing the right thing on one half of their trades.

Furthermore, while the chart shows that the net monthly shift tends to always be away from equities, even during bull markets (presumably due to rebalancing into bonds as stocks outgrow them), one of the strongest periods of net shifting into equities was April through July 2009, just shortly after the March 2009 bottom (with the biggest net shifts coming early in that phase). So maybe "aware investors" are less self-defeating than we thought.



One factor that confounds the analysis (and that Vanguard notes continuously in its 2014 report) is the ongoing shift of 401(k) participants into Target Date funds, due to the increase in 401(k) auto-enrollment* where such funds are the default choice. This is a steady trend that has moved participants away from "extreme" (100% equity or 100% fixed-income) portfolios regardless of the behavior of the markets. For example, 35% of participants had an "extreme" portfolio in 2004, compared to only 14% in 2013. So any analysis of behavior during 2008-2009 has to be aware of that broader background shift.

With that in mind, there is a table on p.63 that shows the percentage of participants in each equity-allocation bucket over the 10-year period. The percentage of participants with a 100%-equity portfolio decreases in steady, stepwise fashion from 22% to 8%. The 2008-2009 period is not detectable in the trendline, which initially suggests that holders of 100% equity didn't panic-sell at all (or at least were balanced by those who shifted to 100% equity).

But then if we look at the 91-99%-equity bucket, the 2008-2009 period is much more detectable, as the number of participants in that bucket dropped sharply from 13% in 2007 to 8% in 2008.

My explanation for this is that a significant number of participants in the 100% bucket are "unaware" participants, who picked the default S&P500 fund when they signed up for their 401(k), and haven't thought about it since. So they didn't even notice the crash (or know what to do about it), and their behavior is not a reliable answer for us. On the other hand, that 91%-99% bucket is the perfect group, because it's almost surely all "aware" investors. This is because you have to consciously create a multi-fund portfolio to achieve 91-99% equity, since no Target Retirement funds go above 90% equities.

And the data shows this bucket did make a significant move away from equities in 2008, much greater than any other decile bucket, including the 81-89% bucket, which dropped only from 19% to 18% (but again, now we're in the bucket where any market-induced shift is at least partly masked by the long-term trend of new participants into Target Retirement funds).

EDIT: forummm mentioned that another explanation for this observation could simply be the effects of the underlying market movements and participants failing to rebalance.



Vanguard clearly has all the data available to answer Jeremy's questions in a thorough and precise manner, but until they do that (or someone finds the pdf!) we're still able to glean a good bit of useful information from these reports. My general feeling now is that this is statistical evidence that people with higher equity allocations do panic more in a crash than those with lower allocations, but that panicking is relatively rare, and maybe rarer than the common narratives would lead you to believe. And maybe most surprising to me, the frequently-heard "I'll be greedy when others are fearful" claim, which I had previously assumed to largely be naive bravado of the untested, is actually detectable in the numbers. Whether such market-timers succeed over the long term is another question, but at least they're there to get one call right.

Objections and further analysis welcome!

*one unrelated, sadfunny side-effect of all this automated "nudging" into 401(k) participation is that, in plans with auto-enrollment, the average employee contribution rate (4.9% of salary) is much lower than it is in plans with voluntary enrollment (7.5%). This is because the auto-enrollment plans have a default contribution rate (often 3%), and people just stick with that. Whereas if they have to make a choice, they pick something higher. Vanguard wisely suggests that the default contribution rate should be increased for auto-enrollment plans, since their research shows people don't really object to higher rates. Ah, inertia, what a beautiful thing!
« Last Edit: March 20, 2015, 09:32:33 PM by skyrefuge »

brooklynguy

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Re: Who Panics in a Market Downturn?
« Reply #31 on: March 19, 2015, 07:19:37 PM »
[gangbusters detective-work and extensive, meticulous analysis]

Jesus H. Christ, skyrefuge, way to put the rest of us to shame.

See that, Jeremy, ask, and the forum shall answer!

My only quibble is that you can't necessarily extrapolate conclusions about the behavior of 401(k) investors (a significant portion of whom believe they are decades away from being able to touch those investments) to the general investor population.

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Re: Who Panics in a Market Downturn?
« Reply #32 on: March 19, 2015, 08:08:23 PM »

My general feeling now is that this is statistical evidence that people with higher equity allocations do panic more in a crash than those with lower allocations, but that panicking is relatively rare, and maybe rarer than the common narratives would lead you to believe. And maybe most surprising to me, the frequently-heard "I'll be greedy when others are fearful" claim, which I had previously assumed to largely be naive bravado of the untested, is actually detectable in the numbers. Whether such market-timers succeed over the long term is another question, but at least they're there to get one call right.


Wow, awesome!  Thanks skyrefuge!

This!  (emphasis mine)


I can see Wall St in general having a vested interest in spreading the "everybody" panics myth.  "You are guaranteed to panic, so you should outsource investment responsibility to us.  We will save you from yourself for just a small fee"


My only quibble is that you can't necessarily extrapolate conclusions about the behavior of 401(k) investors (a significant portion of whom believe they are decades away from being able to touch those investments) to the general investor population.

As you alluded to earlier, this data isn't actionable.  At the end of the day, we are all individual investors and it only matters if we panic aka break our target asset allocation

My primary reason for asking the question is because all over this forum there are comments warning people about the inevitable panic with high stock allocation.  I think it is very wise to use a cautionary voice when an unseasoned newcomer is riding the high of a bull market, but also wise to avoid the fear mongering.  Thus the data

(also thanks for the link to other thread, the Norstad Random Walk analysis is one of the best things I've read in recent memory)
« Last Edit: March 19, 2015, 08:42:38 PM by Jeremy »

a1smith

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Re: Who Panics in a Market Downturn?
« Reply #33 on: March 19, 2015, 08:30:46 PM »
Human psychology is very interesting.

When stocks are down 50%, many sell and run as fast as they can in the opposite direction.  So many people were selling stock in Sept-Oct 2008 and buying bonds that bond yields went negative.

A store puts items on sale for 50% off and people trample (and kill) each other at the entrance of the store and then fight each other in the store to buy the items!

johnny847

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Re: Who Panics in a Market Downturn?
« Reply #34 on: March 19, 2015, 08:35:38 PM »
I can see Wall St in general having a vested interest in spreading the "everybody" panics myth.  "You are guaranteed to panic, so you should outsource investment responsibility to us.  We will save you from yourself for just a small fee"

I never actually thought about this, but it's a logical conclusion!

"small fee" - It's only 1% a year guys! No big deal! The stock market grows so much you won't notice this at all!

sirdoug007

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Re: Who Panics in a Market Downturn?
« Reply #35 on: March 19, 2015, 09:30:42 PM »
When stocks are down 50%, many sell and run as fast as they can in the opposite direction.  So many people were selling stock in Sept-Oct 2008 and buying bonds that bond yields went negative.

A store puts items on sale for 50% off and people trample (and kill) each other at the entrance of the store and then fight each other in the store to buy the items!

There is a confusion of cause and effect that happens in financial markets that makes the store analogy a poor one.

When people sell and run as fast as they can, that CAUSES the price to drop.  People subsequently sell more and run faster reinforcing the crash.   

The stock market doesn't go on sale because some owner needs to move his stagnant inventory of business equity.  It goes on sale because people refuse to buy at the higher prices anymore.  As they get burned by price declines, people generally want stocks less and less.  If pricing based on the last transaction happened in stores the "sales" would very quickly evaporate.

You can't separate the price decline and the selling in financial markets.  They are one and the same. 

This is also why it makes sense that there was a shift into equities in April -June 2009 in the Vanguard report.  Of course there was, that was part of the overall trend that was driving the prices up off the March 2009 low!

skyrefuge

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Re: Who Panics in a Market Downturn?
« Reply #36 on: March 19, 2015, 09:42:56 PM »
My only quibble is that you can't necessarily extrapolate conclusions about the behavior of 401(k) investors (a significant portion of whom believe they are decades away from being able to touch those investments) to the general investor population.

Agreed. Though given that most investor's only investments are in their 401(k)s, it probably is pretty reflective of "the general investor population". It's just that the people whose behavior we're concerned with here are not the general investor population. It would certainly be nice to see the "how many panicked?" numbers broken down by account balance and/or age (which Vanguard has the ability to do), but short of that, I doubt we'll find a more-applicable data source unless we were to actually conduct a rigorous survey of early-retirement.org members.

I found another slightly-more-specific data source from Vanguard: http://www.vanguard.com/jumppage/targetretirement/TRFCOMM.pdf
pp. 6-7 looks at equity-abandonment in 2008 (as opposed to the 2007-2009 period of the other paper). Of people who were auto-enrolled into target date funds, only 0.7% went to 0% equity. Among those who made the conscious decision to put their money in a target date fund, about twice that number (1.6%) bailed. And of those who didn't use target date funds at all, about twice that number (3%) bailed. This trend tells me that the more "aware" an investor is, the more likely he is to panic. Given that we're super-aware investors, I'd guess that our cohort's panic-likelihood is even greater.

(though it's also notable that Vanguard qualitatively says "Overall, few defined contribution plan participants were fleeing the equity markets in times of historic market volatility.")

Fidelity has a paper specifically discussing fear and behavioral effects. In general, like most other sources, it doesn't have a lot of data to support its claims, but it references an analysis it did, similar to Vanguard, of 401(k) equity-abandoners during the last crash. It found 1.8% abandoned equities in 2008Q4-2009Q1, which compares well with Vanguard's 3% (which looked at a period over 4 times longer). But in the process of showing how much better those who stayed in performed over those who bailed, it revealed the average starting account balances of the different groups. Those who stayed the course had the lowest starting account balance ($66k), while those who bailed and didn't get back into equities within 2 years started with $76k, and those who bailed and then jumped back in started with $104k. So this scant, averaged-into-oblivion information vaguely suggests "higher balance" correlates with "increased likelihood to panic" (though also with "higher likelihood to panic but then recover your wits").

All that combined tells me the average Mustachian, with his high market-awareness and DIY tendencies, along with his larger balance, is probably more likely than the average 401(k) participant to panic during a crisis. Not so likely that it would rise to the level of "common", but I wouldn't be surprised if 5 of 100 Mustachians panic at the next 2008-like crash.

sirdoug007

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Re: Who Panics in a Market Downturn?
« Reply #37 on: March 19, 2015, 09:57:18 PM »
Check out the Vanguard Defined Contribution plan asset allocation over time.  The dash more to cash than bonds.  Pretty clear risk avoidance and loss aversion going on here.


skyrefuge

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Re: Who Panics in a Market Downturn?
« Reply #38 on: March 19, 2015, 10:11:59 PM »
I can see Wall St in general having a vested interest in spreading the "everybody" panics myth.  "You are guaranteed to panic, so you should outsource investment responsibility to us.  We will save you from yourself for just a small fee"

I dunno, that seems like an unnecessarily conspiratorial leap to me. The relatively-benevolent Vanguard promotes the importance of risk tolerance and asset allocation just as much as anyone I've seen, and while they aren't actually saints, they aren't quite "Wall St." con-men either. And since the almost-universally-given solution to avoiding panic is to simply "invest more in bonds", that's not exactly some high-profit center for Wall Street to exploit. And if your sales pitch is going to be based on a lie anyway, "let me help you stop you from fucking yourself over" also sounds like a much less-effective tactic than "let me help you get rich".

If you feel like you've heard people saying "everybody panics" (I don't feel like I've heard that), I think a sufficient explanation can be simply that panicking is so damaging to those who do it, that in an attempt to highlight the danger, advisors can sloppily conflate the consequences with the incidence.

The data still doesn't dispute the notion that higher equity-allocations result in higher panic-rates, even if those rates aren't dramatically high.

This is also why it makes sense that there was a shift into equities in April -June 2009 in the Vanguard report.  Of course there was, that was part of the overall trend that was driving the prices up off the March 2009 low!

No, not "of course". The Vanguard report looks only at individual, 401(k) investors. It's entirely possible, even expected, for the behavior of that subgroup to differ from the wider market. If not, we wouldn't even need to look at any of this data. We could just look at a stock market chart and say "see, 2008 proves that investors panic".
« Last Edit: March 19, 2015, 10:15:49 PM by skyrefuge »

brooklynguy

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Re: Who Panics in a Market Downturn?
« Reply #39 on: March 20, 2015, 07:16:11 AM »
Given that we're super-aware investors, I'd guess that our cohort's panic-likelihood is even greater.

But, as Jeremy noted in the other thread that gave birth to this one, the average early retiree (who accumulated sufficient assets to retire at a young age) is also more disciplined than the average investor.  The same is true for the average aspiring early retiree who has already made significant progress towards achieving FIRE.  The same is even probably also true for the average rookie aspiring early retiree, who has made a conscious decision to attempt to follow a long-term disciplined plan.  And even those in our cohort whose investing careers so far know nothing but a bull market (and therefore have not yet had their investing mettle tested) have still demonstrated above-average self-control in other areas of their lives.

If you feel like you've heard people saying "everybody panics" (I don't feel like I've heard that), I think a sufficient explanation can be simply that panicking is so damaging to those who do it, that in an attempt to highlight the danger, advisors can sloppily conflate the consequences with the incidence.

The data still doesn't dispute the notion that higher equity-allocations result in higher panic-rates, even if those rates aren't dramatically high.

It may not be a conflation of the consequences with the incidence, but of the incidence of the urge to panic with the incidence of the occurrence of panicking.  Even if the data were to tell us that higher equity-allocations led to negligible increases in panic-rates among individual investors, the "temptation to panic" rate may still be much higher.  During the financial crisis, I stayed the course and continued to plow excess funds into the stock market, but in order to do so I had to actively fight off the "what if this time really is different?" thoughts that crept into my mind.  And I'm a poster-boy mustachian who spends his free time defending the virtues of 100% stock allocations on internet discussion boards.

Retire-Canada

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Re: Who Panics in a Market Downturn?
« Reply #40 on: March 20, 2015, 07:34:00 AM »
I spent 10yrs in the Army and one thing I've learned is that it's very hard to tell who will lose their mind when the shit really hits the fan.

The guys who seem like the toughest most relaxed and confident can be the ones that buckle first when fear, uncertainty and doubt hit them hard.

Everybody is a hero in the bar or at the keyboard.

-- Vik

Metta

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Re: Who Panics in a Market Downturn?
« Reply #41 on: March 20, 2015, 07:38:19 AM »
Who cares who panics, as long as you don't? And by not panicking, I mean not selling, even if you explain (rationalize) it as a tactical move.

I've been 100% in stocks since 1984 (except for my home equity) and haven't sold anything except when I wanted the proceeds for a life goal-related purchase or expense. I watch the news, but just don't flinch. I'm taking the long view. When I get close to FI, like within a year or two, I might reallocate a bit. But until then I plan to be in stocks and to cover my ears and hum when there's a downturn. It's worked well so far.

:)  That's our strategy too. We've done a lot of covering our ears and humming over the years.

Still, it pays to care about other people's panic. My mother panicked in 2008, forced my father to sell mutual funds and their retirement was permanently harmed. 2008 was also the year my father was diagnosed with end-stage renal failure so his mental condition wasn't what it once was or he might have had the strength to hold the line as he had many other times when the market went down. (We didn't find out about this until long after the financial damage was done.)

Health is another factor in assessing risk tolerance. What you are capable of dealing with today when you are strong and healthy isn't necessarily the same thing you are capable of dealing with when your body is battered from within and your emotions are raging with fear from many directions. How one protects oneself from bad decisions made during periods of ill-health is something I am puzzling over. How do you hedge against a weakened version of your worst self? Especially when the only thing your weak and worst self is capable of at that point is sitting and reading or watching the news? And if the news at that point is raging with bad news? The only thing that seems to me to work is the low information diet.

brooklynguy

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Re: Who Panics in a Market Downturn?
« Reply #42 on: March 20, 2015, 09:19:50 AM »
How one protects oneself from bad decisions made during periods of ill-health is something I am puzzling over. How do you hedge against a weakened version of your worst self?

A while back Nords had started a great thread on this topic:

http://forum.mrmoneymustache.com/investor-alley/retirement's-biggest-risk-declining-cognition/

Grog

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Re: Who Panics in a Market Downturn?
« Reply #43 on: March 20, 2015, 09:21:17 AM »
Shouldn't "Panic" be somewhat discernible from google research trends?
I wonder if you could predict market crash by looking at what people are googling, for instance you could identify over-confidence when query trends switch from "stock market at all-time high should I invest" to "investing with leverage".
I wonder if there is some correlation with those kind of query and the stock market. It's a pity we only have like 10 year or less of "google" data and, we don't really have all the data freely at disposition.

If emotions play a role, then google could time them.

Kaspian

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Re: Who Panics in a Market Downturn?
« Reply #44 on: March 20, 2015, 11:32:31 AM »
Skyrefuge --> Very interesting!  I assume this takes into account all the schlocky high MER fee funds everyone was offering that were sold?   (I remember 2008 footage of large lines of people at banks waiting to withdraw their mutual funds completely.)  Also, I see the stats there but it must be very difficult to measure the lack of new monies into equities.  People got crazy, rushed to buy gold, and then did so again in 2011.  (I remember footage of queues of people waiting to buy gold several times over that period.)  Not investing at all and putting all your money into gold when it was $1921?  I would also consider that as a "panic". 

Quote
Rick Ferri :

...The ability of young people to handle high levels of equity is a fallacy. It may be technically correct based on long-term returns, but not on short-term emotion. Many young people have far less appetite for equity risk than the age-based model assumes. This is because they’re inexperienced at taking risk and this often leads to capitulation during a bear market.

^^ I'd never thought of that.  If a 22-year old's portfolio drops from $4000 to $2000 if may seem like the end of the fuckin' world.  If an older person's portfolio halved to $250,000 they may be pissed off yet grit their teeth and get through the gauntlet.  It could not even be an age thing as opposed to how your grand total appears to you. 

It's well known that the greatest detriment to any investor is their own behaviour.  Knowing that, and even knowing I'm a rational, calm person, I insist on putting bulwarks in place for myself and making my risk tolerance lower than I "think" it is.  (I also don't buy cookies because even though I "think" I'll be able to resist, I inevitably eat the whole box in one day.)
« Last Edit: March 20, 2015, 11:52:39 AM by Kaspian »

brooklynguy

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Re: Who Panics in a Market Downturn?
« Reply #45 on: March 20, 2015, 12:01:46 PM »
If a 22-year old's portfolio drops from $4000 to $2000 if may seem like the end of the fuckin' world.  If an older person's portfolio halved to $250,000 they may be pissed off yet grit their teeth and get through the gauntlet.  It could not even be an age thing as opposed to how your grand total appears to you. 

I think the reverse would usually be true (which seems to be borne out in the data, as skyrefuge discussed above).

The reaction of a 22-year old whose $4k portfolio drops to $2k might be:  "Shit, I just lost two thousand bucks--it's going to take me two weeks to earn that back!"

The reaction of a 55-year old whose $500k nest egg gets cut in half might be:  "Holy fuck, I just lost half my life savings!!!"

Metta

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Re: Who Panics in a Market Downturn?
« Reply #46 on: March 20, 2015, 12:32:31 PM »
How one protects oneself from bad decisions made during periods of ill-health is something I am puzzling over. How do you hedge against a weakened version of your worst self?

A while back Nords had started a great thread on this topic:

http://forum.mrmoneymustache.com/investor-alley/retirement's-biggest-risk-declining-cognition/

It is a great thread! However, its focus is on a likely mental decline due to age and most people who discussed it focussed on Alzheimers or similar slow-moving mental decline. Others suggested that the key to all of this was to stay healthy. However, staying healthy is sometimes beyond our control. Accidents happen to even the healthiest people. Cancers emerge even in people who lead healthy lives. Painful conditions occur even to the young and bring with them difficult emotions. When people are in the midst of a miasma of pain, their thinking is compromised. Once health returns, cold rationality reasserts itself. However, if someone is already afraid because they are dealing with great pain or a life-threatening illness and the market crashes with media doomsayers stirring up even more fear, it can be hard to avoid selling into a down market. It would be nice to find a way to curtail one's own worst impulses at these times.

Kaspian

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Re: Who Panics in a Market Downturn?
« Reply #47 on: March 20, 2015, 12:34:07 PM »
If a 22-year old's portfolio drops from $4000 to $2000 if may seem like the end of the fuckin' world.  If an older person's portfolio halved to $250,000 they may be pissed off yet grit their teeth and get through the gauntlet.  It could not even be an age thing as opposed to how your grand total appears to you. 

I think the reverse would usually be true (which seems to be borne out in the data, as skyrefuge discussed above).

The reaction of a 22-year old whose $4k portfolio drops to $2k might be:  "Shit, I just lost two thousand bucks--it's going to take me two weeks to earn that back!"

The reaction of a 55-year old whose $500k nest egg gets cut in half might be:  "Holy fuck, I just lost half my life savings!!!"

Yeah, but somebody who just got a slapdown would be far more likely to just yank their $2K and close the account than you would with $250K.  (Even the thought of the paperwork and tax crap involved in pulling out $250K in one go gives me a headache.) 

...And losing money right away, in your early years, without having seen gains over a decade would be highly discouraging.

frugalnacho

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Re: Who Panics in a Market Downturn?
« Reply #48 on: March 20, 2015, 02:11:49 PM »
If a 22-year old's portfolio drops from $4000 to $2000 if may seem like the end of the fuckin' world.  If an older person's portfolio halved to $250,000 they may be pissed off yet grit their teeth and get through the gauntlet.  It could not even be an age thing as opposed to how your grand total appears to you. 

I think the reverse would usually be true (which seems to be borne out in the data, as skyrefuge discussed above).

The reaction of a 22-year old whose $4k portfolio drops to $2k might be:  "Shit, I just lost two thousand bucks--it's going to take me two weeks to earn that back!"

The reaction of a 55-year old whose $500k nest egg gets cut in half might be:  "Holy fuck, I just lost half my life savings!!!"

More like "Holy fuck, I just lost half my life savings, and I have no idea if or when it's going to stop bleeding"

johnny847

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Re: Who Panics in a Market Downturn?
« Reply #49 on: March 20, 2015, 04:32:03 PM »
If a 22-year old's portfolio drops from $4000 to $2000 if may seem like the end of the fuckin' world.  If an older person's portfolio halved to $250,000 they may be pissed off yet grit their teeth and get through the gauntlet.  It could not even be an age thing as opposed to how your grand total appears to you. 

I think the reverse would usually be true (which seems to be borne out in the data, as skyrefuge discussed above).

The reaction of a 22-year old whose $4k portfolio drops to $2k might be:  "Shit, I just lost two thousand bucks--it's going to take me two weeks to earn that back!"

The reaction of a 55-year old whose $500k nest egg gets cut in half might be:  "Holy fuck, I just lost half my life savings!!!"

Yeah, but somebody who just got a slapdown would be far more likely to just yank their $2K and close the account than you would with $250K.  (Even the thought of the paperwork and tax crap involved in pulling out $250K in one go gives me a headache.) 

...And losing money right away, in your early years, without having seen gains over a decade would be highly discouraging.

Just so we're all on the same page, the quote you guys are talking about had no data backing it whatsoever.