“When the going gets rough, the 1 percent start selling.”
The Super Rich Were the First to Bail During the Financial Crisis
That’s the finding of a new paper that says people with the highest income bailed from stocks disproportionately on the worst days of the financial crisis. The share of selling by the biggest earners rose “sharply” in days following spikes in volatility…“Very, very high income people are disproportionately likely to sell a bunch of stock during a financial crisis,”…“We find that, starting in September 2008, the share of sales volume attributed to the top 0.1 percent of income recipients and other top income groups rises sharply until the beginning of 2009, and in 2008 and 2009 the sales of these groups are relatively more associated with stock market tumult as measured by the VIX,” they wrote.
Specifically, according to the paper, a roughly 10 percent increase in volatility correlated with a 3.3 percent increase in sales volume for the top 0.1 percent of earners, relative to less-affluent investors. When the VIX went up 25 percent, proportionate selling by the ultra-rich rose almost 8 percent.
Other investor demographics, from gender to marital status to place of residence, showed no signs of being related to the volatility sensitivity of stock sales, the study showed.
While the IRS data provided new means for assessing who unloaded equities during the crisis, it doesn’t give a complete picture, the authors note. Absent from the numbers are share purchases, which would provide net selling data. It’s also possible that people increase levels of selling from non-taxable retirement accounts during crises.
So were people who sold during the 2008 rout guilty of a behavioral bias involving market timing or just good traders? Both could be true. Someone selling early in the plunge avoided at least part of the biggest equity wipeout since 1937, which saw the S&P 500 plummet 57 percent.
At the same time, holding stocks since the 2007 peak hasn’t been a money-losing proposition. The S&P 500 has posted annualized return of almost 6 percent since the high point in October 2007.
“At this point it’s too early to tell whether market timing has been successful,” Reck said. “We have the data — we know what they sold and we can tie it to historical stock prices. But right now, we’re not conclusive one way or the other.”