Ultimately, the S&P 500 gained 16 percent by the end of that first pandemic year, and soared more than 25 percent in 2021.
Indeed, the difficulty that follows fear-based selling is figuring out when exactly it is “safe” to get back into the water. Most people end up waiting too long, similar to the investors Vanguard studied, and miss out when the market bounces back.
That can cost investors dearly, even those who eventually return.
Consider three hypothetical retirees with identical $500,000 portfolios, consisting of 60 percent stock funds and 40 percent bonds — a fairly common allocation for Vanguard retirees heading into 2020.
Let’s say each of them reacted differently to the pandemic plunge. Here’s what their portfolios would have looked like on Oct. 31, 2024, assuming they reinvested all dividends:
Investor 1. She stayed invested throughout the zigs and zags of the pandemic.
Projected portfolio balance: $741,670
Investor 2. He panicked and sold on March 16, 2020, one of the peak moments of volatility. He remained in cash, missing out on all gains had he reinvested.
Projected portfolio balance: $471,514
Investor 3. She also panicked, selling entirely to cash at the peak of volatility, but reinvested as the market rebounded in late May.
Projected portfolio balance: $625,843
“The costs of panicking to cash in 2020 would have been significant — generating lost wealth well into the six figures,” said Andy Reed, head of investor behavior research in Vanguard’s investment strategy group. He ran the numbers using its market hindsight tool, which lets investors run portfolio simulations, using actual market events, that illustrate what would happen if they were to move to cash or reinvest.
