Dow's Selloff Sparks Biggest Trading Day for Vanguard Retail Investors

Retail investors turned the Dow Jones Industrial Average’s 348-point plunge yesterday into the biggest trading day of the year at Vanguard Group Inc., the largest U.S. provider of stock and bond mutual funds.

“We didn’t see panic,” said Tim Buckley, managing director of the retail investor group for the Valley Forge, Pennsylvania-based firm. “We saw investors buying.” Buckley declined to specify trading volume.

The Dow had its biggest intraday percentage decline yesterday since the market crash of October 1987, losing as much as 998.50 points, or 9.2 percent, before paring its drop to 347.80 points at the 4 p.m. close of trading in New York. The Standard & Poor’s 500 Index fell as much as 8.6 percent, its biggest intraday fall since December 2008, before trimming declines to end down 3.2 percent at 1,128.15.

Bel Air Investment Advisors bought some large-cap, multinational, blue-chip companies after clients called wondering what to do as markets plunged, said Todd Morgan, senior partner at the Los Angeles-based firm.

“It was a good entry point on cash we’ve been sitting on for a long time,” Morgan said. Bel Air oversees $4.5 billion for clients, who have an average of $17 million in investable assets.

Rich Adamonis, spokesman for the New York Stock Exchange, said “there were a number of erroneous trades” during the plunge. The selloff on concern Europe’s debt crisis will halt the global recovery briefly erased more than $1 trillion in market value.

Silver Lining

“Young investors have to remember that there’s a silver lining when the Dow plummets,” said Christine Fahlund, senior financial planner at Baltimore-based T. Rowe Price Group Inc. “They’re able to buy more shares of their preferred investments.”

Fahlund recommended that retirees stay the course rather than lock-in losses by selling now. If they can’t do that, older investors should consider liquidating only a small portion of their portfolios at a time, meaning 5 percent or 10 percent in a day, she said.

Harold Evensky, a financial adviser at Evensky & Katz, in Coral Gables, Florida, said he’ll be calling clients today to keep them calm.

“My response is this is a lot of noise,” Evensky said, whose firm has $600 million in assets under management. “We’re still trying to understand what triggered it. Something happened, and I can only believe that it was exacerbated by automatic program trading. This cannot be explained by the panic of regular investors.”

Rational Value

The Dow’s decline helps shake investors’ belief that markets rationally represent value, said Dan Ariely, professor of psychology and behavioral economics at Duke University in Durham, North Carolina.

“The effect of this volatility is that it’s going to be depressing,” Ariely said.

The market drop may not cause investors in 401(k) retirement plans to make changes, said Lori Lucas, defined contribution practice leader for Callan Associates Inc., an investment-consulting firm based in San Francisco.

“The typical person doesn’t make a single trade during the year,” Lucas said. “People don’t know what to do, and there is a powerful inertia.”

As retail traders realize the drop may have been caused by erroneous trading, they won’t be as panicked, said Randy Frederick, director of trading and derivatives at San Francisco- based Charles Schwab Corp.

Things will get back to normal today, Frederick said. “The eyes will go back to Greece.”

Diahann Lassus, a fee-only financial adviser in New Providence, New Jersey, said most of her clients had been putting money back into the market since last year.

“We’re looking at this as a good opportunity to rebalance and add back,” Lassus said. “It’s best to edge in over time, so you don’t have a nervous breakdown.”

To contact the reporters on this story: Margaret Collins in New York at mcollins45@bloomberg.net. Amy Feldman in New York at afeldman16@bloomberg.net.

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