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By Ian Salisbury
May 4, 2016
TongRo Images—Alamy

The media likes to portray the super rich as savvy — if not, ahem, downright brilliant — when it comes to money. But during the financial crisis, a new study suggests, many of them made a basic investing mistake.

You don’t need to be a Wall Street tycoon to know the key to success in the stock market is to buy and hold for the long run. Granted it’s not always so easy. Emotions can get in the way. But most middle-class investors know that trying to time the market — that is, jumping out as stocks plunge, then trying to get back in before they recover — is a fool’s errand. Now a trove of tax return data examined by researchers from the University of Michigan, Ohio State and the IRS, suggests the wealthiest investors have been trying to do just that.

The study, reported earlier by Bloomberg, looked at mutual fund sales reported in 2008 and 2009 tax returns by the top 0.1% of earners and everyone else. Baking in the fact that the rich tend to trade more already, the authors found that the super wealthy were more likely than others to sell shares when the stock market got rocky. When the VIX, a commonly used measure of market volatility, rose 25%, proportionate selling by the ultra-wealthy rose nearly 8% relative to other investors. “Very, very high income people are disproportionately likely to sell a bunch of stock during a financial crisis,” Daniel Reck, one of the researchers told Bloomberg.

The researchers were careful not to draw too much from the conclusions. For one, the data doesn’t reflect retirement accounts, which could skew the results. It also doesn’t show how the ultra-wealthy investors actually fared in the long run. Since taxpayers only report mutual fund sales — not purchases — to the IRS, the new data doesn’t show when investors bought back in. That leaves at least a glimmer the possibility that wealthy investors who sold indeed managed to get back into the market before stocks rose. In other words, if you put this information before a jury, there might not be enough evidence to convict beyond a reasonable doubt. On the other hand, years of research into market timing efforts by professional money managers suggests “calling a bottom” is all but impossible to pull off. So the circumstantial evidence is pretty strong.

Of course, it doesn’t take that much imagination to see how wealthy investors might think they can time the market when others fail. Psychological studies have shown how accumulating wealth and power tends to give people an illusory sense they can influence events that are beyond their control. For instance, one 2009 study involving a dice game, showed that people who enjoyed the trappings of power tended to insist far more than those who didn’t on rolling the dice themselves, rather than delegating to other players. Who rolled, of course, had zero effect on the outcome. But, the researchers concluded that powerful individuals seem to believe, at least in some mystical, atavistic way, that they could influence the outcome.

It seems that lesson applies to the stock market too.