Hold your course
It’s normal to feel anxious, concerned, worried, or even fearful during times when markets are highly volatile or losing value. It’s also understandable if this volatility or decline makes you feel like it’s time to get out of the market.
There’s a reason for this: research shows that, as humans, we feel the pain of loss much more sharply than we feel the joy of winning, gaining, or earning.
This is called “loss aversion,” and it’s the reason you might feel extremely passionate about doing something like getting out of the market and moving your portfolio cash.
Here’s an example from the most recent time we went through a market upheaval like the one we’re seeing now to illustrate how this can hurt you.
Panic Leads To More Losses Than Volatility
Vanguard created a chart to show what happened to 3 investors who found themselves at the bottom of one of the worst bear markets in history: the Great Recession.
From 2008 to 2009, even balanced portfolios lost almost 30% of value. It was, to say the least, a stressful time to have money in the market.
Each of the investors chose a different course of action:
Investor 1, represented by the blue line in the chart below, decided to stick with her plan. She started with a 50/50 allocation and didn’t sell out of the equities portion.
Investor 2 couldn't stand the pain of loss anymore. Although he initially had the same 50/50 portfolio allocation, he decided to sell all his equities to buy into bonds. He sold all of his stocks to buy bonds, feeling this was “safer.”
Investor 3 felt she had to protect the money she had left, and she sold everything to move to cash.
So how did the investors end up?
Investor 1 — who stayed put and stuck to her plan — regained all the lost value in her portfolio by mid-2010. By 2017, her portfolio balance was almost double the other two investors who panicked and couldn’t stick with their investment strategy.
It took Investor 2 almost 8 years just to regain the lost value in his portfolio. And he’s far behind Investor 1, who stayed invested according to her plan.
And Investor 3, who moved to cash to protect her money? Not only did she never make her money back, but she’s also the only one of the investors in this scenario who ended up with a realized loss.
What this shows us is that the investors who panicked and sold equities at the bottom of the market would have taken years to break even… or they would have realized their losses and locked them in, to wind up with far less money than they would have had they done nothing and simply stayed the course.
This is a time to hold your nerve and your course. I know it is nerve-wracking but, more than anything else you want to be able to enjoy the recovery when it comes. The only certain way to own shares for the upturn is to own them now.
Take care out there and if you have any questions please feel free to get in touch!