Free for 90 days: Sign up now and get 90 days managed free after your first deposit. See offer details

Limited time offer: Sign up today and get up to 1 year managed free. See details

Get your next rollover managed free in 2018. Learn how to enroll

Investing

Individual Investors After the Crisis: Giving Up or Going It Alone?

The aftermath of the crash reveals some worrying trends in investor behavior.

Dan Egan

By Dan Egan
Managing Director of Behavioral Finance & Investing, Betterment  |  Published: February 14, 2013

I like to keep up on the latest in the behavioral finance literature, and a recent paper by a collaborator of mine – Martin Weber, one of the biggest names in behavioral finance – caught my eye. He finds that many individual investors reacted in a mix of good and bad ways to the financial crisis.

  1. They reduced their exposure to active managers…
  2. By leaving the market altogether (“despite strong tax incentives to remain invested in equities”).
  3. Or increasing their exposure to concentrated equity positions they manage themselves.

While the first point is good (reduced use of actively managed funds), the second two are really bad!

The first point speaks to “a loss of trust in financial intermediation prompting some investors to abandon the stock market altogether and the remaining investors to take on more idiosyncratic risk, on average.

While I’d definitely say avoiding active management costs and under-performance is key, selling after a fall in prices is precisely the wrong behavior! The more you try to actively time the market, the lower your returns will be.

Equally worrying is that they moved to holding concentrated equity positions themselves. If the average professional manager can’t outperform the index in his full-time job, what makes these individuals think they can do it in their spare time?

Perhaps it’s just because they don’t have Betterment accounts. Our analysis indicates that only a small minority of Betterment clients sell or go defensive after a fall in value. Our site is built to encourage optimal behaviors like rebalancing and staying the course, and makes it easy to not get fearful when the markets are choppy.

Recommended Content

View All Resources
ETF Selection for Portfolio Construction: A Methodology

ETF Selection for Portfolio Construction: A Methodology

Betterment seeks to maximize investor take-home returns, which drives our investment selection criteria and process.

How’d the Market Do? That’s Harder To Answer Than You Think

How’d the Market Do? That’s Harder To Answer Than You Think

In taxable investing, your after-tax return—the amount you “take home”—is what’s important. Yet far too many investors focus on market performance. Let’s look at the difference.

Get All the Returns You Deserve

Get All the Returns You Deserve

We set out to make investing more efficient—and we have. With our platform, your investor returns can get a boost of 2.66%.

Start your investment plan

I am

years old and

  • Not Retired
  • Retired

.

My annual income is

.

Experience the new way of investing. Sign up today.

Start investing smarter

Get started

Refer a friend or family member and get up to 1 year managed free

Refer a friend

How would you like to get started?

Your first step toward a smarter investing future starts here.

Create a Betterment account

Go ahead and join the smart, modern way to invest.

See what we can do for you

Tell us a bit about yourself, and we’ll show you the benefits of investing with us.

Get a free investing checkup

Help us get a sense of your investing approach and see how you could improve.

Transfer a 401(k) or an IRA

Move an existing retirement account into a Betterment IRA.

Download the mobile app

Enjoy the Betterment experience anywhere on the go.

For more information and disclosures about the Betterment Resource Center, click here. | See our contributors.