The stock market had an extremely abrupt price decline in March, hit a bottom on March 23rd, and has since bounced back sharply from those levels.
During this time, there was natural debate about whether the subsequent rally was a “bear market rally” (a classic bounce in stocks during a bear market that fails to reach previous highs and eventually falls back down to make new lows), or whether it was the start of a new bull market from a major market bottom.
According to interfund transfer data, TSP investors tried their hand at trading it. They pulled a ton of money out of the three equity funds in February and March, and put it into the G Fund to the tune of almost $10 billion in February and $15 billion in March. Then, they put a little bit of it back into equities in April.
Depending on the specific part of the month they made most of these moves, it could have turned out good or bad. For example, investors that pulled money out in February or early March, and put money back in by early April, did pretty well. On the other hand, investors that pulled out in the second half of March, right near the equity bottom, and put money back in by late April or not at all, would have underperformed.
Interestingly, investors even pulled money out of the diversified lifecycle funds, especially in March:
It pays to be careful with these types of moves. Skilled investors that use a well-defined process may be able to make it worth their while, but many investors will hurt their returns with these types of moves, especially over a full investing career.
A series of studies by Dalbar Inc, shown here by J.P. Morgan, repeatedly found that the average investor significantly underperforms both stocks and bonds over long periods of time:
This is because investors have a tendency to sell in fear at market bottoms, and buy back with greed at market tops. Of course, they don’t know they are market tops or bottoms while they’re doing it, and only see in hindsight what they did.
For many investors, sticking with a diversified strategic portfolio is a good way to grow wealth over the long-term.
Investors that want to trade markets should at least make sure they are knowledgeable and know what they are getting into. Occasional trading with a counter-cyclical approach (buying more equities after sell-offs, and vice versa), or using a disciplined trend-following model, can sometimes yield good results for people that put in the time, but even that is not guaranteed.
In general, investors would do well to follow a version of the common medical oath: “First, do no harm.” In other words, less is often more when it comes to moving money around. Only when one has a high level of knowledge for what they attempt and with a specific process in mind, is an active investment decision likely to be worthwhile.
Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.