Are You an Equity Abandoner?

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What is an equity abandoner and would you know if you were one?

The term is used by mutual-fund giant The Vanguard Group to describe investors who sell their stocks when the going gets tough.

If it sounds pejorative, well, that’s the idea. Investors who abandon their equity are quitters, cowards, nincompoops, violators of all that’s right and decent in the investing world.

Vanguard is too diplomatic to put it that way, of course, but the general idea is that investors should ride out stock-market downturns in order to enjoy the bond- and cash-beating returns stocks offer in the long term. Many investors who move to the sidelines when stocks fall stay there too long, missing the rebound. They commit the cardinal sin: buying high, selling low and buying high.

Recently, Vanguard took a look at equity abandonment among the firm’s investors during the financial crisis, from the start of 2007 through October 2009. Overall, true abandonment is not enormous. The highest rate came in October 2008, when stocks were in a tailspin and about 1% of Vanguard’s stock investors pulled out of the stock market entirely.

However, the fears that drive true abandoners can cause other investors to trim stock holdings or refrain from making new investments, though the study did not measure these behaviors. For months, cash-flow data from the fund industry have shown that investors are favoring bonds over stocks, meaning that many have made less than they could have during the stock market’s dramatic rebound over the past year.

So, the same factors that drive abandonment may cause other self-defeating actions.

“We show that equity abandonment rates were relatively lower among those investors using any form of balanced fund,” Vanguard reports. “We also show that men were more likely to abandon equity than women, and that those with lower equity allocations were more likely to abandon stocks than those with higher allocations.”

For example, investors holding target-date funds were less than half as likely to abandon stocks as other investors. These funds hold a mix of stocks and bonds, and they are designed for investors who prefer a hands-off investing style for the long term.

Women were 10% less likely to abandon stocks than men. Investors age 65 and older were twice as likely to walk away from stocks as those aged 45 to 54. That’s not a great surprise, as investors with less time to recover from downturns, and a more immediate need to draw on investment funds, are less willing to take risks.

But the 65- or 70-year-old left with no stocks may not get enough growth to keep up with inflation and fund a retirement that could last another 20 or 30 years.

Finally, abandonment was higher among investors who had devoted smaller portions of their portfolios to stocks to begin. Again, the low allocation probably indicates an aversion to risk that is accentuated by a market downturn.

Vanguard’s conclusion? That investors are well-served by funds that mix stocks and bonds — target-date funds and balanced funds. The bond portion dampens downturns when stocks hit a rough patch, so the investor’s results aren’t as disturbing. Investors using funds devoted solely to stocks are more likely to suffer abrupt drops in value, making investors more likely to bail.

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