Of all the silly criticisms of passive index-based investing — and there are many — the most laughable is the one about how passive investors are going to react during a crisis: “Just wait until the next market sell off” we have been warned, and “you will see exactly how dangerous passive truly is.”
The problem with that line of argument is that we have seen numerous selloffs and crashes during the era of passive indexing. Over the past dozen years, we have had numerous market drawdowns, most notably the 56% drop during the 2007-09 GFC, and the more recent 34% crash during the Covid-19 pandemic. (The 20% sell-off during Q4 2018 almost looks quaint in comparison).
How did passive investors behave?
Vanguard, one of the two giant passive behemoths along with BlackRock, regularly shares information about how its investors’ trading behavior. It is worth recalling that then CEO/Chairman Bill McNabb explained to us in a 2015 MiB that Vanguard investors were net buyers throughout the financial crisis.
If that was not enough of a clue, the chart above shows the “cash panickers” during the Coronavirus market volatility, from the peak in February past the March lows and throughout April and May 2020 rebound.
The result: Less than one half of one percent of Vanguard Investors moved to cash — thats less than 0.50%. This is at a time when the unemployment rate spiked up towards 30% and nearly 40 million people lost their jobs.
Whatever your criticisms are about low cost, passive, index-based investing, the behavior of its adherents during crashes and panics should not be one of them. Unless you want to look like a fool or worse, it is time to retire this canard.