Whenever disaster strikes people run for safety. They race outside when a house catches fire and head to the basement when a tornado tears through town.
And when the stock market takes a sudden fall, they sell stocks and hide the money in cash.
That's the move plenty of people have made since markets went wild this summer, and the ongoing turbulence has tested average investors' ability to stick with their financial plans. It's a natural response to flee in the face of danger, except that when it comes to investing, it's usually the wrong one.
"The only person who gets injured on the roller coaster is the person who tries to jump off in the middle of the ride," said Rob Austin, director of retirement research at Aon Hewitt, a human-resources consulting firm.
When worries about the global economy started shaking Wall Street last month, organizations that track the actions of average investors spotted a surge of money flowing out of the market and into cash. Average investors pulled a net $9.8 billion out of mutual funds targeting U.S. stocks and put $9 billion in the money market during the week ending August 26, according to the Investment Company Institute, a trade group. This month, some of them seem to be taking their cues from the market's weekly swings -- money creeps into U.S. funds one week and gets pulled the next.
At the height of the tumult, Aon Hewitt noticed more workers were shuffling investments in their 401(k) plans. On August 24, major stock indexes suffered their worst day in four years and "trading activity went through the roof," Austin said. The number of trades jumped to seven times the daily average, as a rush of accountholders sold stocks and tucked more money in cash. Two popular brokerages, Charles Schwab and E-Trade Financial, said trading in individual accounts set records that day.
Phones started ringing at financial-planning firms as clients called for help. Larry Ganzell, a 70-year old retiree in Carlsbad, California, was following the market's 4 percent plunge on cable business news while on the phone with friends, many of them also retired and living on a fixed income. He noticed a creeping sense of panic.
"We know there are ups and downs in the market," Ganzell said, "but when you get to be our age, the downs have a tendency to be bit more scary."
Ganzell called his financial planning firm, Blankinship & Foster, and talked to a few of the firm's advisers. Rick Brooks, the chief investment officer, helped settle his nerves. Brooks's advice: Turn off the TV and stick to your long-term plan.
"The few folks who called in a panic told us that their friends were panicking," Brooks said. "It's understandable if you were watching news shows telling you the sky was falling."
Financial planners frequently warn their clients against reacting to news reports and market swings. Fran Kinniry, a principal in Vanguard's investment strategy group, said that people are susceptible to thinking that a sudden turn in the market implies something about the long-term. The turbulence that has knocked the S&P 500 down nearly 8 percent since May comes with the territory. It's the risk that comes with the reward.
A wild move in the market one week "is not like seeing a unicorn," Kinniry said. "Stocks are volatile. But you're not investing for one day or one week, you're investing for 10 or 20 years."
The urge to act when it seems your 401(k) balance has sprung a leak is often hard to resist. A pivotal psychological study often cited in the investment world found that the emotional reaction to a loss was roughly twice as intense as a reaction to a similar gain.
The problem is, trying to avoid losses by hiding in cash can easily backfire. Average investors began fleeing the market before the financial crisis hit in 2008, then kept pulling billions out of U.S. stock funds throughout the recovery. It wasn't until the beginning of 2013 that average investors tiptoed back in, but waiting carried a cost. Those who returned that January had already missed out on a 36 percent gain over the previous four years.
Recent research by Vanguard, the mutual fund giant, found that the actual gains people received for investing in a mutual fund was 1.5 percentage points behind the fund's return each year. How to explain the gap? It's the consequence of chasing the herd, buying and selling in reaction to the market's moves.
The encouraging news, say representatives from Vanguard and other firms, is that the majority of people have managed to sit tight. The billions of dollars pulled out of U.S. mutual funds over the past month makes up a tiny fraction of their roughly $6 trillion in assets.
To stomach the sudden turns, advisers say, it helps to keep the big picture in mind. The stock market lost ground in roughly one out of every five years since World War II, yet still managed to reward investors with an 8 percent annual return on average. The way up is a long, bumpy ride. That 8 percent average gain is made up of steep drops, big jumps and everything in between.
"In baseball terms," Kinniry said, "it's all strikeouts and homeruns."