Brendan McDermid / Reuters

Even though it’s precisely what many financial advisors tell their clients not to do, it’s understandable that a tanking stock market scares some people into cutting their losses and selling their shares. Understandable, maybe, but it wouldn’t be off-base to guess that those who divest are inexperienced or too poor to weather market volatility.

But a new paper that looks at assets sales during the financial crisis suggests that that might not be a totally accurate representation of who sells during a crisis. Jeffrey Hoopes, Patrick Langetieg, Stefan Nagel, Daniel Reck, Joel Slemrod, and Bryan Stuart, the paper’s authors, looked at a highly volatile period during 2008 and 2009 in order to investigate who was most likely to sell off their holdings, and what assets they were shedding. To figure out the “who” they looked at IRS data on those who paid capital-gains tax on asset sales and matched it up with demographic information from Social Security files and the Survey of Consumer Finances, such as age and income level.

One group the researchers found to be especially likely to sell off their assets was older Americans. It makes sense that older investors are more likely to ditch their holdings when the market starts to tank. That’s because those who are closer to, or already in, retirement are supposed to be more risk-averse, since a decline in their overall portfolio will have a more immediate impact on their financial well being. They also have less time to wait out the market, in hopes of recouping their losses, before they start using their savings on retirement expenses.

But the other group that was more likely to shed their assets was a little more surprising. Starting in September 2008, the top 0.1 percent of income earners started selling off significantly more of their assets, and continued doing so until the start of 2009. Sales of mutual-fund holdings were more prevalent than direct-stock sales, with mutual-funds climbing to 50 percent of all sales, compared to just 30 percent during the pre-crisis period. Unsurprisingly, most of the assets that were sold were related to the financial industry.

What drove this wealthy, ostensibly sophisticated investor group to go against accepted wisdom? Though they didn’t have specific enough data to assign specific motivations to each seller, the researchers combed through the existing body of research done on the behavior of investors, and suggested a few theories. The fact that mutual funds saw the largest defection points to risk sensitivity: Investors—of any age—likely purchase mutual funds because they are considered fairly safe. It follows, then, that volatility and a sinking market would scare them off. When the market goes bad, these investors may blame fund managers and pull their money, the paper suggests. It also may be true that a financial downturn makes some of these investors generally less trusting of financial intermediaries—resulting in their dumping any investments that require one.

For those who sold individual stocks during the downturn, it’s possible that high-income investors monitor their portfolios more closely, and are able and motivated to dump holdings before they drop too far, the researchers say. Or, more affluent and experienced investors might presume they have good market timing, and temporarily reduce their exposure to the stock market during bad times, with a plan to return when they think it’s on the way up again. One additional explanation might be that some investors might avoid selling an asset because they fear the idea of locking in a loss—something researchers call the disposition effect, and which has been shown to be more present among younger, less wealthy investors. Conversely, wealthier stockholders might sell simply because they’re less afraid to do so; locking in losses simply isn’t as devastating for them.

And a possibility that the researchers didn’t go into is that wealthy investors often have the benefit of employing financial experts, which means that they are privy to more analysis about what is causing a tanking market, if they should jump ship, and when to do so. That doesn’t mean that it’s always a wise decision, but the wealthy have a leg up there too, if experts had some big-picture information that smaller-scale investors didn’t.

The authors don’t come to any concrete conclusions about whether or not selling during the midst of volatility proved fruitful or not for wealthy Americans. If they held their assets for a long time and sold before a stock tanked, it’s possible that they still profited, based on the share price they bought in at. If not, they may have taken a hit, but it’s also likely that they had additional holdings that could help counter that loss. In fact, a small share of rich Americans hold the bulk of stocks, and the wealthy have recouped just about all of their losses since the recession.

So does that mean that selling during a downturn should be the new normal? Probably not. The volatility illustrated during the recession was extreme, and extended. Attempting to time the market to sell during a shorter and less aggressive downturn could likely be disastrous, especially for less experienced investors, who might sell low only to watch the market rebound in the coming weeks or months, leaving them worse off than they began.


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