The past few years have been a trying time for anyone navigating the world of investment or in possession of illiquid assets; the combination of disruptive events, including a global pandemic, political unrest, and economic uncertainty has created a turbulent market that has been almost impossible to predict. For many investors, the automatic response to seeing the value of their shares drop dramatically in a short amount of time is to panic, followed by the instinctive urge to ‘cut one’s losses’ and cash in these investments in an attempt to try to crystallise their remaining value before they are exposed to additional damages. In the vast majority of scenarios, this is absolutely not the best course of action and could end up costing you far more in the long run. But how can you resist the urge to sell in times like these? And how can you be sure that holding your nerve is the wisest thing to do?
Why do investors react this way?
Behavioural finance suggests the first thing to do when experiencing the anxiety described above is to acknowledge that it is a perfectly natural reaction and is a universal experience for all investors, even the most experienced. It is, without doubt, an unnerving experience to watch the value of an asset in which you have invested hard-earned money fall by the day, hour, or even by the minute when you are powerless to do anything about it. It is precisely this lack of control combined with the unpredictability of market fluctuations that precipitates in people the temptation to sell. Without the comfort of the potential that the market will stabilize and recover, leading to the restoration of an asset to its previous standing, it is all too easy to imagine the worst-case scenario: the value of your investments falling until they are worth next to nothing, leaving you with nothing to show after years of saving and financial diligence.
It is important to remember that this is an incredibly rare scenario, and that investments rise and fall. However, it is easy to forget this when times get tough. The actions of other investors can also exacerbate the feeling of distress in these kinds of scenarios; watching others panic-sell can reinforce the idea that it is a logical decision and also results in the value of the investment falling even further. The rise of social media commentary on personal finance can be equally damaging, with those who are not necessarily qualified presenting themselves as experts and making recommendations that could be detrimental to your financial future. It is always better to go to an experienced adviser with the relevant accreditations with any concerns or questions you might have regarding investments rather than acting on advice you read online or on social media.
How to resist the urge to sell
Even if you are aware that selling during a bear market may not be a wise decision to make, sometimes that is still not enough to resist the urge to do just that. However, there are a few things you can bear in mind to reinforce that messaging when you feel anxious about sticking it out until the market recovers.
Whilst we might not be able to predict the future, we can take comfort in the past. When reflecting on previous periods of economic instability, we can see that the market does always eventually recover, and with it, the value of stocks, shares, and investments. During covid, many investments fluctuated wildly, but the majority ultimately stabilised and recovered their pre-pandemic value. If you feel the temptation to sell, try to remember that historically, the data is on your side, and it is usually just a matter of time before the situation improves.
It can also help to bear in mind the permanence of the decision to sell; once that decision is made, the value of your investments is locked-in and there is no going back. Whilst your investment is still active, its value is fluid and free to change, but the decision to sell cannot be undone.
If you know anything about the basics of investing, you will be aware that most of the time it is a long-term strategy; statistically, the longer you hold an investment, the more likely it is that you will experience a bear market whilst in possession of invested assets. Accepting a turbulent market as an inevitability at some point can help re-frame your perspective on the situation and make it easier to process. If you need additional reassurance, you can always consult a financial adviser; speaking with an experienced professional can be a great source of comfort during uncertain times.
Are there any scenarios in which I should sell?
There are some scenarios in which it might possibly be right to sell, but these are few and far between. For example. If you have the majority of your assets tied up in investments and you are likely to need access to cash in the near future, selling might be the best way to ensure this is possible. If you are unable to wait for the market to recover you run the risk of being forced to sell at the bottom of the market, resulting in an even worse return on your investment than if you were to have sold earlier on. This is a decision that needs to be considered extremely carefully and should not be taken lightly. We highly recommend seeking the advice of an experienced professional before committing to any course of action.
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This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity.