Buy and Hold, Not Cut and Run: Private Investors Showed Some Surprising Behaviour Throughout the Financial Crisis

By Peter Brooks, head of behavioural finance, Barclays Smart Investor

Even in the depths of a global financial crisis, individual investors can be a resilient lot.

Much has been made of the lessons for policy makers and the banking system following the financial crisis a decade ago. But Barclays conducted an analysis throughout the crisis to find out how their investing customers acted, and the findings were a real surprise.

The fall of Lehman Brothers in September 2008 was only one of a number of dates that affected the confidence – and likely the behaviour – of the UK’s self-directed investors, those who trade directly without professional advice.

There was the run of Northern Rock a full year before; successive, dramatic Bank of England interest rate falls; and other failures at financial institutions. The stock markets still had a good six months to fall before they reached their lowest levels of the crisis.

Each of these incidents was highlighted in media coverage as a likely reason for investors to run for the hills. But largely they didn’t. Analysis of investor behaviour during the crisis (using Barclays data) shows a sizeable set of customers seeking out other opportunities to invest.

In 2008 Barclays’ Behavioural Finance team embarked on a two-year project to better understand the attitudes of these self-directed investors. It proved timely for the worst possible reason: we released our first study just two weeks before Lehman Brothers filed for bankruptcy and then followed our panel of investors through the crisis. Since then, the findings have found their way into several academic studies of the crisis, and they present us with an unparalleled window into how investors behave in times of crisis.

Our hypothesis followed intuition that fear would be the dominating emotion; investors would want to take less risk; and we’d see a sharp spike in trading activity as portfolios are changed. That isn’t what we found.

In the days following the fall of Lehman Brothers, for instance, we saw average trades per investor per day increasing three- or four-fold. That was a change from placing an investment trade once every few weeks to making a trade every few days. Score one for our expectation of more trading.

Even though self-directed investors undertook more activity, it wasn’t necessarily a lot of selling. More people opened accounts, for one thing. In August 2008 we saw just under 2,500 accounts opened. That leapt to nearly 5,500 in September and then to over 11,500 in October 2008 – levels that wouldn’t normally have been seen outside of ISA season. When we looked at the years of investing experience of people who opened accounts, over 60% of those who joined during volatile market periods had less than one year of experience. That compares to around 10% of those who open accounts in rising markets. It appears that when stock markets grab the news, investors are attracted to the potential opportunities.

Looking at the number of buy and sell trades is inconclusive. During volatility, we observed that there were more approximately 10% more buys than sells. This may be a signal that people are adding to their portfolios, but diversifying your holdings might lead to a sell order being followed by more than one buy order.

What they didn’t do was cash-in their holdings. Indeed, one academic paper that used this Barclays data suggested that investors held fairly risky portfolios throughout the crisis. Their study calculated the risk of individual portfolios and showed that as stock markets displayed greater risk, so too did investors’ portfolios. There was no evidence that investor behaviour led a large number of investors to hold safer assets.

The conclusion? We like to think our customers are informed, smart investors, rather than speculators, whose investing habits are often focused on long term performance rather than short term reaction. Inevitably, this is a very broad generalisation, but we think the behavioural data bears this out.

We sincerely hope we never see another financial crisis like the one that hit in 2008, but from this analysis we can take some confidence that smart investors will not cut and run.

By Peter Brooks, head of behavioural finance, Barclays Smart Investor

Even in the depths of a global financial crisis, individual investors can be a resilient lot.

Much has been made of the lessons for policy makers and the banking system following the financial crisis a decade ago. But Barclays conducted an analysis throughout the crisis to find out how their investing customers acted, and the findings were a real surprise.

The fall of Lehman Brothers in September 2008 was only one of a number of dates that affected the confidence – and likely the behaviour – of the UK’s self-directed investors, those who trade directly without professional advice.

There was the run of Northern Rock a full year before; successive, dramatic Bank of England interest rate falls; and other failures at financial institutions. The stock markets still had a good six months to fall before they reached their lowest levels of the crisis.

Each of these incidents was highlighted in media coverage as a likely reason for investors to run for the hills. But largely they didn’t. Analysis of investor behaviour during the crisis (using Barclays data) shows a sizeable set of customers seeking out other opportunities to invest.

In 2008 Barclays’ Behavioural Finance team embarked on a two-year project to better understand the attitudes of these self-directed investors. It proved timely for the worst possible reason: we released our first study just two weeks before Lehman Brothers filed for bankruptcy and then followed our panel of investors through the crisis. Since then, the findings have found their way into several academic studies of the crisis, and they present us with an unparalleled window into how investors behave in times of crisis.

Our hypothesis followed intuition that fear would be the dominating emotion; investors would want to take less risk; and we’d see a sharp spike in trading activity as portfolios are changed. That isn’t what we found.

In the days following the fall of Lehman Brothers, for instance, we saw average trades per investor per day increasing three- or four-fold. That was a change from placing an investment trade once every few weeks to making a trade every few days. Score one for our expectation of more trading.

Even though self-directed investors undertook more activity, it wasn’t necessarily a lot of selling. More people opened accounts, for one thing. In August 2008 we saw just under 2,500 accounts opened. That leapt to nearly 5,500 in September and then to over 11,500 in October 2008 – levels that wouldn’t normally have been seen outside of ISA season. When we looked at the years of investing experience of people who opened accounts, over 60% of those who joined during volatile market periods had less than one year of experience. That compares to around 10% of those who open accounts in rising markets. It appears that when stock markets grab the news, investors are attracted to the potential opportunities.

Looking at the number of buy and sell trades is inconclusive. During volatility, we observed that there were more approximately 10% more buys than sells. This may be a signal that people are adding to their portfolios, but diversifying your holdings might lead to a sell order being followed by more than one buy order.

What they didn’t do was cash-in their holdings. Indeed, one academic paper that used this Barclays data suggested that investors held fairly risky portfolios throughout the crisis. Their study calculated the risk of individual portfolios and showed that as stock markets displayed greater risk, so too did investors’ portfolios. There was no evidence that investor behaviour led a large number of investors to hold safer assets.

The conclusion? We like to think our customers are informed, smart investors, rather than speculators, whose investing habits are often focused on long term performance rather than short term reaction. Inevitably, this is a very broad generalisation, but we think the behavioural data bears this out.

We sincerely hope we never see another financial crisis like the one that hit in 2008, but from this analysis we can take some confidence that smart investors will not cut and run.