Most investors understand that markets go up and down, but there are times when these swings are especially dramatic. During these big swings, investors can be tempted to either BUY when the market has risen or SELL when the markets are down. Intuitively this can make sense. No one wants to miss out on the party when things are going well, and likewise we have been quite rightly conditioned to flee when things look dangerous.
But are these the right things to do when it comes to managing our investments?
The short answer, and one often quoted is “no, of course not”; however this can be easier said than done. The mantra may well be “buy low and sell high”, but the average investor’s behaviour is typically the exact opposite.
As indicated above, it is easier to put money into the market AFTER it has been doing well. This is especially true if that winning streak has lasted 6 months or more. Conversely, it is also much harder to buy securities after a downturn, especially if the sell-off meets the definition of a Bear Market, i.e. down 20% or more.
The biggest sell-offs of equities by retail investors have typically occurred after markets are already down 20% or more. This was true in 1987, 2001 and 2009 (and almost certainly again in March 2020, although the data will obviously not be in for a few more weeks). These same investors then buy back in to the market only after it has had a large recovery. How does this impact their portfolios? They lock in their losses at or close to a market bottom, then miss out on most of the recovery before feeling it is safe enough to go back in.
How would this look in a $1,000,000 portfolio? We will use the crash of 2008-09 as our example with a start date of September 15, 2008 since this was just before Lehmann Brothers collapsed and the crash began*.
Market value on October 6, 2008 (SELL TO CASH): $ 710,000
Value of cash on March 9, 2009 (market bottom): $ 710,000
Buy again on April 19, 2010 (after 20% recovery): $ 710,000
Market Value on Dec 31, 2019: $1,165,235
In this scenario the investor would be up 11.65% over the entire period. What would have happened if they had stayed invested instead?
Market value on October 6, 2008 (DOESN’T SELL): $ 710,000
Market Value on March 9, 2009 (market bottom): $ 630,000
Market Value on Dec 31, 2019: $1,767,182
This story can be repeated with every previous market downturn in history. While this time may be different, we at CH do not believe this to be the case. The stock and bond markets are reflections of the long-term performance of the economy. If we could somehow successfully predict when the economy would go into recession, AND THEN ALSO when it was about to recover, we might be able to perfectly time the market. But the reality is no one (including the best economists and investors in the world) has been able to do this successfully over time. To do so means we would need to be lucky both when we sold, and likewise when we bought back in again. Instead, we believe it is better to remain patient, and trust those investment managers who have successfully navigated through prior market crisis events. The partnerships we’ve created with these managers are very strategic; we trust them with our own personal assets and fully believe in their abilities to make smart investment decisions. This holds true when times are good, and also when they are a bit less certain.
This isn’t the first time the markets have acted the way they have over the last few weeks – and even though these are unprecedented times, so were 1987, 2001 and 2008 while they were unfolding. History has proven time and again that unless you have a crystal ball, the biggest financial payoff in times of uncertainty is to hang tight. Just ask Investor Two!