It's Really Hard Not to Panic
Key Takeaways
“Don’t panic” and “Invest when markets are down” is usually easier said than done. Going through volatile markets can feel like a really long time, but when zoomed out, it is but a mere blip in history.
When we are hit by waves of bad news, it always feels like worse things are around the corner. However history tells us that bad years for markets are not always followed up by more bad outcomes.
There are always smart sounding decisions to sell or stay in cash, but periods of chaos are often the cost of admission for longer-term returns.
The two biggest investing mistakes are panic buying and panic selling.
2022 was a bad year for markets (see chart below). Not the worst, but bad enough — it was a year where both stocks and bonds were down by double-digit losses; a year where bonds did not perform their function in tempering the volatility and reducing losses in a balanced portfolio; a year where a conservative investor lost as much as a more aggressive one.
You may notice from the chart that a bad year for markets doesn't mean it will be followed by another bad year — unless there was something very wrong with the financial system. And now, in 2023, a new bull market has been declared as stocks have risen above +20% from the Oct 2022 market lows.
After a bad 2022, many investors felt that 2023 could be similar or worse. After all, the forecasts for this year were pretty bleak; the war was ongoing, inflation was high, and a recession was looming large.
Could the negative sentiments towards this year be recency bias? — something Nobel Laureate Daniel Kahneman has studied and detailed — this mental flaw means that our brains place more importance on events which have recently occurred. When something bad (or good) happens, we automatically assume that it will continue. We allow it to shape our decisions — like assuming your winning streak in the casino will continue, or the stock market sell-off would go on.
2022 felt like a really long time when you were going through it. If you had kept up with our communication and updates, our key takeaway was that as long as financial stress and risk levels were not high — then the decline typically would not last abnormally long.
The median decline during such this type of a sell-off would be just over -20% and the duration of the decline would be around 10 months. With hindsight, we can now see that the average figures turned out to be exactly what happened — with Oct 2022 marking the bottom of the sell-off. We hope that you had heeded our advice!
There are always smart-sounding decisions to sell or to switch investments. As the chart on global stock returns below shows, stocks had gone up around 6x since 1995 even with plenty of great reasons to get out of the market along the way.
That being said, there have been times where there were long stretches of flat or negative returns. Take for example the 2008 Global Financial Crisis — investing near the peak of the market would mean waiting for nearly 9 years to breakeven. And this is assuming that you still had the fortitude to hold stocks after it went down nearly -50%. Many investors panicked and went to cash or safe investments during that turbulent period.
Professional investors and fund managers are not immune to reacting to news as well. Under the Morningstar Tactical Asset Allocation Fund Category — (which categorises funds which shift between asset classes, equities, bonds and cash in order to take advantage of different market situations) have been shown to be poor performers.
Instead of preserving capital and taking advantage of market recoveries, these funds almost always do not deliver the goods. In the example below, we charted buy and hold global stocks, global stocks managed based on the GYC Risk Matrix signal (similar to the United G Strategic core fund), and a popular tactical asset allocation strategy during the COVID-19 pandemic sell-off. The results were as follows:
The coloured background shows a daily update of the market via the GYC Risk Matrix signal
The blue line is a strategy managed using the Risk Matrix
The orange line, a simple buy-and-hold strategy
and the green line is the tactical strategy.
The tactical asset allocation strategy ended the year with a -10% loss, whilst the other two ended the year slightly above +10%.
So while history provides us with so many learning lessons, we really need to dig deep and steel ourselves during periods of decline and fear to actually practice what we’ve learnt. This is the only way we can succeed and have a positive investment experience.
As financial writer Morgan Housel surmises, “Bad news almost never supersedes the power of true patience, and periods of chaos are the cost of admission for longer-term returns.”
To find out more, come and have a chat with us.
