Older investors handled last year’s volatility worst

Posted by Robin Powell on April 9, 2021

Older investors handled last year’s volatility worst




We have met the enemy and he is us.

— Pogo comic strip by Walt Kelly, 1970


The year 2020 was a stressful one for investors as the pandemic led to a severe bear market, the sharpest drop over a short period in history, and significant volatility. Morningstar examined how investors in 401(k) plans reacted to the stress, evaluating changes made by more than 520,000 participants with an average balance of $145,404.

Following is a summary of the findings:

  • 41.2 percent of participants were self-directing, 49.7 percent were using a target-date fund, 5.6 percent were defaulted into managed accounts, and 3.4 percent opted into managed accounts.
  • Younger participants were more likely to use professionally managed portfolios, while older participants were more likely to self-direct their accounts.
  • Among participants self-directing their accounts, 13 percent changed equity allocations by more than 5 percent. 
  • Participants making allocation changes tended to be older, with higher incomes and higher balances, and had more conservative portfolios.
  • Participants self-directing their accounts who made allocation changes tended to move to more conservative portfolios, especially during the first quarter of 2020, where the average change in equity allocation dropped by 17 percentage points. Older participants invested in aggressive portfolios tended to make the largest changes. Females made larger changes than males.
  • Younger participants were much more likely to increase risk if they were invested conservatively and only had relatively minor reductions in equity allocations if they invested aggressively. In contrast, the oldest participants who were invested conservatively only had relatively modest increases in risk, while those who were invested aggressively had significant reductions in risk.
  • Three and a half percent of participants using a target-date fund and 3 percent of participants using retirement managed accounts opted out of their respective strategies (for example, started self-directing) during 2020, about a quarter of the percentage of self-directed participants that did so. 
  • Males were more likely to stop using a professionally managed investment strategy during 2020 than females, an effect that persisted even after controlling for participant demographics.
  • The underperformance for reallocators was estimated at 7.5 percent through the entire year based on average changes across all self-directors who changed allocations (versus participants who rebalanced quarterly).

The findings led Morningstar to conclude: “This analysis demonstrates that professionally managed investment options, such as target-date funds and managed accounts, were relatively ‘sticky’ during the recent period of market volatility, especially when compared with the decisions of participants self-directing their accounts. Additionally, participants who ‘stayed the course’ likely had better performance than those who transacted.”

They report adds: “These results strongly suggest age is an important driver of how investors respond to market turmoil. In theory, older individuals should be ‘better’ investors since they have more experience investing; however, these results suggest that among participants who made a change to their portfolios, the changes tended to be the most extreme among older investors. This suggests older participants are likely to benefit the most from being invested in a professionally managed solution (for example target-date funds or managed accounts) since these types of investments proved to be significantly stickier during the first quarter. Unfortunately, older investors appear to be relatively less interested in delegating investment-management responsibilities.”

And finally the authors state: “This research strongly suggests that there is an additional value associated with professionally managed investment solutions for 401(k) participants, because participants using these options were less likely to make changes during the period of recent market volatility. Participants need help, and it is essential that plan sponsors make professionally managed investment solutions, such as target-date funds and retirement managed accounts, available to keep participants on the road to a successful retirement.”


The most important lesson

As Warren Buffett once said, “The most important quality for an investor is temperament, not intellect.” Older investors, who should know that better than younger investors, often lack it.

The most important lesson from this latest research for investors is to establish an asset allocation plan that both anticipates the occurrence of severe bear markets and does not have a higher equity allocation than you have the ability, willingness or need to make.

In other words, having a plan that you can stick with is a necessary ingredient for investment success and is far more important than having the “right” allocation. 


Three key questions

To help investors stick with their hopefully well-thought-out plan, in his book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, Carl Richards recommends asking three questions before you make investment decisions based on your own or someone else’s forecast:

  • If I make this change and I am right, what impact will it have on my life?
  • What impact will it have if I am wrong?
  • Have I been wrong before?

If you ask and honestly answer those questions, you will be acting more like Warren Buffett (who recommends avoiding market timing, but if you do it, you should buy when others are panicked sellers) and less like the majority of investors who are engaging in behavior destructive to their portfolios.


Should yo be your own adviser?

Following are some other questions you should ask yourself if you believe you are best served by being your own adviser: 

  • Do I have the temperament and the emotional discipline needed to adhere to a plan in the face of the many crises I will almost certainly face? 
  • Am I confident that I have the fortitude to withstand a severe drop in the value of my portfolio without panicking? 
  • Will I be able to rebalance back to my target allocations (keeping my head while most others are losing theirs—buying more stocks when the light at the end of the tunnel is a truck coming the other way? 

As you consider these questions, think back to how you felt and acted after the events of September 11, 2001, during the great financial crisis that began in 2007, and during the COVID-19 crisis. Experience demonstrates that fear often leads to paralysis, or even worse, panicked selling and the abandonment of well-developed plans.


Even knowledgeable investors fail

When subjected to the pain of a bear market, even knowledgeable investors fail to do the right thing because they allow emotions to take over, overriding the brain.

Morningstar’s finding that older (and thus more experienced) participants with higher incomes and higher balances (attributes typically associated with more sophisticated investors) who made allocation changes were the very ones most likely to abandon their plans when stressed by market volatility indicates that many investors are over-confident of their abilities (an all-too-human trait).


The information presented here is for educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice.  Certain information is based upon third party data and may become outdated or otherwise superseded without notice.  Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.  Investing involves risk including loss of principal. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth® or Buckingham Strategic Partners® (collectively Buckingham Wealth Partners). LSR-21-60



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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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