09 Mar The Risk of Panic Selling
During times of high volatility, it can be very tempting to want to pull out of your stock market investment. But according to a recent study by Bank of America this might be the worst thing you can do.
Panic selling not only locks in losses but also puts investors at risk for missing the market’s best days. For you often find that the best days in the stock market come right on the back of the worst days
Take last week as an example. The indexes posted sizeable losses on three days but also enjoyed its two largest daily point gains on record and ended the week with a 1.8% gain.
The impact of missing those large up days is extremely significant.
According to the Bank of America study, if an investor missed the 10 best days of each decade since 1930 their total returns would be just 91% verses 14,962% if they just stayed invested the whole time.
Think about it. Missing just the single best day each year lowers returns from 14,962% down to 91%.
The only way you can make sure you catch those big up days is to stay invested even though you want to sell out.
Experts advise investors to avoid the impulse to time the market, which can be difficult even for professional traders.
According to an Axis Mutual Fund study spanning a period of 16 years from 2003 to 2019, equity funds delivered a compound annual growth rate of 18.8% but investors in these funds only returned 12.5%?
Why is that?
It is because investors try and time the market and mostly get it wrong. The study also found large fund inflows happened after a period of good returns, not before it.
We see this all the time. Investors try to time the market but only end up making things worse. They would be better to ride it out.
We know it is tough watching your investments fall but it will be tougher if you miss the recovery.
We will close with a comment from Warren Buffett which he wrote in his most recent letter to shareholders.
“Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater. But the combination of The American Tailwind … and the compounding wonders described by Mr. [Edgar Lawrence] Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions.”
What Buffett is ultimately saying is “keep calm, and invest for the long term.”