The true cost of panic selling: Investors who bailed out when the market plunged in March lost up to ten times more than those who held their nerve
When a sea of red hits the trading screens it is understandable that some investors panic and bail out of the market.
The trouble is, that for most it’s too late to get out by the time a fall hits the news headlines. Only traders glued to high-speed trading terminals have any chance of getting out while a plunge is underway, before most of the damage is done.
The only good option available to most retail investors once a sell-off has hit is to ride it out. Stock markets always recover, the only question is how long it will take.
A sea of red hit the trading screens in March this year as the pandemic spread
In the case of this latest crash, not long at all. Failing to realise this and selling straight after the slump is very costly.
Even if you think that over time the market will slip back again, it always seemed very likely there would be some degree of bounce in the near term.
Analysis from Quilter has put some numbers on this. They reveal that those who divested at the bottom of the market in March may have lost ten times more than those who waited it out for just two months.
If you then decided the stock market wasn’t for you after that, you would still have been able to get much more of your money back than if you had sold in the middle of the panic.
Taking some key Investment Association sectors as benchmarks, running the numbers revealed that depending on the asset class, investments recovered anywhere between 9 per cent and 19 per cent by the end of May.
Quilter has run the numbers on the pandemic-triggered market crash we saw in March
For example, someone who had £100k invested at the beginning of the year and was invested in an average fund in the IA Global sector would have since seen their investment drop as low as £78,645.
However, since then it has recovered to £98,159 at the end of May, meaning losses only a tenth the size in percentage terms.
The numbers also offer a useful reminder that if you are likely to need to cash out in the near future you must taper down your equities position in favour of cash and bonds. The plunges for the mixed IA categories were less severe than the equities-only ones in most cases.
Mark Pittaccio behavioral economist at Quilter Financial Planning commented: ‘Successful investors know that investing is a long-term commitment. Rationally we know that if we are able to ride out the periods of decline in the market investments will recover. And it should be easier to spot as we have been here before with 2008 being one of the most recent examples in history.
‘However, rationality does not always prevail and when you start seeing your investment value dropping by hundreds and then thousands of pounds it can be hard 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 feel pleasure in gains. If acted upon, this natural aversion to loss causes the greatest detriment to investors.
Bad day at the office: A trader on the floor of the New York Stock Exchange on March 12, 2020
‘It is therefore important to remember the purpose behind their investing in the first place and to look at the whole picture rather than just last night’s negative headlines,’ he continued.
‘Learning to cope with these emotions remains a vital lesson. When we see our portfolio value plummet along with our expectations we need to be able to resist the natural temptation to run and sell when prices are low.’