staying disciplined amid uncertainty

Most investors know buying low and selling high is a central tenet to most successful investment philosophies, yet the majority of investors do the exact opposite when faced with uncertainty and fear-invoking headlines. This fact is not at all surprising. Humans are neurologically wired to be horrible investors.


The graph below plots the S&P 500 index amid corresponding headlines. After hitting all-time highs in February, the index plunged as the seriousness of COVID-19 became apparent and many investors fled to cash.

The graph also shows a near-perfect correlation between market declines and inflows to cash throughout 2020. Inflows to cash peaked in 2020 during the absolute market bottom in March.


Subsequently, the chart also shows the majority of that cash was not re-invested until the market had already rallied nearly 20%. Investors that fled to cash and missed a material part of the market rally, permanently impaired their lifetime returns.


The chart below measures the opportunity cost of not being fully invested throughout last year's volatility. In weeks that saw net inflows to cash, the S&P 500 index returned 41.49% on average. In weeks that saw net outflows to cash, the S&P 500 returned 14.22%. In other words, a massive amount of money was sitting on the sideline during the most rewarding parts of last year.


Source: Avantis Investors. Money market flow data from the Investment Company Institute. Index returns from Bloomberg.


There are always reasons not to invest (especially in 2020!), however markets have always rewarded long-term, disciplined investors. Now is a great time to reassess your investment strategy and make sure it’s one you can stick with in good times and bad.