The real cost of panic selling: Investors who got out of the market when the market slumped in March lost up to ten times more than those who got on their nerves for two months
When a red sea hits the trading screens, it is understandable that some investors panic and exit the market.
The problem is that for most, it's too late to come out when a fall hits the headlines. Only dealers stuck to high-speed trading terminals have a chance to get out during a dive before most of the damage is done.
The only good option available to most retail investors after a sellout is to get rid of them. The stock markets are always recovering, the only question is how long it will take.
A red sea hit commercial screens in March of this year as the pandemic spread
Not long in the event of this last crash. Not realizing this and selling right after the break-in is very expensive.
Even if you believe that the market will decline again over time, it always seemed very likely that some upswing would occur in the near future.
Quilter's analysis put some numbers to it. They show that those who sold at the bottom of the market in March may have lost ten times more than those who waited only two months.
Then, if you had decided that the stock market wasn't for you afterwards, you could still have gotten a lot more of your money back than if you had sold in the middle of the panic.
Using some key sectors of the Investment Association as a benchmark, the numbers showed that investments recovered between 9 and 19 percent by the end of May, depending on the asset class.
Quilter calculated the figures for the pandemic market crash in March
For example, someone who invested £ 100,000 earlier in the year and was invested in an average fund in the IA Global sector would have seen their investments decline to £ 78,645 since then.
Since then, however, it has recovered to GBP 98,159 at the end of May, meaning that the losses are only a tenth of the percentage.
The numbers also provide a useful reminder that if you are likely to need a payout in the near future, you will need to reduce your stock position in favor of cash and bonds. The slump in the mixed IA categories was in most cases less severe than in the pure equity categories.
Mark Pittaccio, behavioral economist at Quilter Financial Planning, commented: & # 39; Successful investors know that investing is a long-term commitment. Rationally speaking, we know that market investment will recover if we are able to overcome the periods of decline in market investment. And it should be easier to see, as we have done here before, with 2008 being one of the most recent examples in history.
"However, rationality doesn't always prevail, and when you find your investment drops hundreds and then thousands of pounds, it can be difficult to sit there and deal with the sinking feeling in your stomach."
“We feel the pain of losing what we already have more than we enjoy winning. This natural aversion to losses causes the greatest damage to investors.
Bad day in the office: A trader on March 12, 2020 on the floor of the New York Stock Exchange
"It is therefore important to remember the purpose of your investment and look at the whole picture rather than just the negative headlines from last night," he continued.
“Learning how to deal with these emotions remains an important lesson. When we see our portfolio decline along with our expectations, we must be able to resist the natural temptation to run and sell at low prices. & # 39;