Your portfolio
Nervous investors would do well to look back over
the last 100 years in markets to put this sell-off into
perspective and focus on how stocks have recovered
from previous crashes
“Loss aversion makes a loss twice as
painful as a gain of the same amount.
The primal need to avoid loss, then,
prevents us from making sound
decisions.”
She adds that herding bias has a
strong role to play, where people
follow the lead of others to avoid
feeling isolated. This phenomenon
explains why people were panic-
ANNUALISED RETURNS OF
AVERAGE US EQUITY FUND
INVESTOR VS INDEX
Average equity
fund investor (%)
S&P 500 (%)
30yrs 5.04 9.96
20yrs 4.25 6.06
10yrs 9.43 13.56
5yrs 7.79 11.7
3yrs 11.5 15.27
1yr 26.14 31.49
Source: Dalbar 2020 Quantitative Analysis of Investor
Behavior Study
TRUSTNET
[ INVESTOR PSYCHOLOGY ]
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buying food before lockdowns were
even announced. “At times of crisis,
changes in our neural chemistry make
it difficult for us to deny our need to
belong in the group,” Tiwari continues.
“There is a constant internal battle
inside an investor between wanting
to do the sensible thing and the forces
that are biologically driven, which
want to make us feel good.
“When people panic sell, the
biologically driven forces are winning.
Panic buying in the supermarket is
driven by many of the same forces –
the primal need to not be left behind
leads a shopper to stockpile, even
though their logical brain will know
this is not necessary.”
How panic affects your portfolio
It may seem like a harmless
way to take back some
control in plunging markets,
but how does a bout of panic
selling affect portfolios in
the long term? Investors are
often warned not to attempt
to time the market because
even the professionals can’t
do this successfully, and
missing the best few days
can cost you dearly in the
long run. Research from
Quilter Investors found
that keeping £10,000
fully invested in global
equities in the 20
years to the start of
2020 would have
grown to £32,535,
but missing the best
15 days over that time
would have cut this
figure in half.
The 2020 Quantitative
Analysis of Investor
Behavior Study from US
financial research group
DALBAR indicated that
most ordinary investors
underperform benchmarks
because of their tendency
to sell in tough periods.
Since 1984, 70 per cent
of average investor
This too shall pass
Nervous investors would do well
to look back over the last 100 years
in markets to put this sell-off into
perspective and focus on how stocks
have recovered from previous
crashes. Lawson says his clients
have so far resisted the urge to flee
to cash, and he urges other investors
to look at the bigger picture as well.
underperformance
occurred in 10 key
periods in which investors
withdrew their money
during market crises.
The average equity
fund investor was a net
withdrawer of assets last
year, so is it a coincidence
that they made a return
of 26.14 per cent in 2019,
underperforming the
S&P 500 return of 31.49
per cent? That said, the
research also noted
that most investors are
generally showing a
little more patience:
the average holding
period for stocks is
now 4.5 years, the
highest ever recorded
in 36 years of the
study.
“I am absolutely certain that, in
five years’ time, markets will be
significantly higher than they are
now. I can look back over the last
five years and see that, even now,
with the markets at their lows
they are at today, portfolios have
still beaten cash on deposit,” he
says. “And I do believe that this
will pass.”
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