Why keeping calm & not panic selling during a market downturn is the smarter choice
The ongoing conflict in Ukraine, disruption in the global supply chain, and increasing inflation rate are just a few affairs enough to ignite a global economic crisis. Since mid-Feb 2022, US stocks alone have lost around 25%. And as we are writing this article, the market continued its downturn amidst interest rate hikes announced by FED a few days back.
In an economic crisis, there are three common investor responses to a market crash: 1) Dash-for-cash, 2) Stick-with-stocks or 3) Double-down.
Now, if we can take a step back and think about it, what would you do?
In the article that we are sharing today, the author analyzed the time it took for the market to recover after a major market crash.
There have been 11 occasions in the past 148 years between 1871 and 2019 when stocks have declined by at least 25% in value. In the 2001 and 2008 downturns, losses exceeded 40%.
On average, the median recovery time from this point of market bottom has been 1.8 years. The author then analyzed the number of years before all the losses are recouped for the three 'personalities' described above (table below).
According to the analysis, dash-for-cash investors from the 2001 and 2008 crashes were still in the red. The message is crystal clear: selling out of the stock market in favor of cash would have been very bad for wealth over the long run.
History shows that investors who hold their nerve are likely to end up with a better long-run outcome. Those who are in a position to be able to add to portfolios could end up even better off and are unlikely to end up worse off.
But of course, the actual scenario can be a lot more complicated. We should be cautious with the mathematical analysis performed in this article as the author has assumed that the 'double-down' investors start buying into the market when it has dropped by 25% and continue to allocate money to the portfolio monthly. However, in reality, this might be easier said than done due to emotional and psychological barriers. That said, we still believe the article provided a very compelling argument and analyses of the different strategies that might prepare us for what lies ahead.
To wrap it up
In summary, it seems like the two best options for investors are either to stick with stocks or to continue to slowly add to your portfolio as the market is coming down. While this might be hard to do due to psychological and emotional barriers, it is probably the better option.
If you liked our article please subscribe to our free newsletter to get our articles directly in your inbox, just hit the subscribe button at the bottom left.
Disclaimer: All opinions shared in this article are the opinions of the authors and do not constitute financial advice or recommendations to buy or sell. Please consult a financial advisor before you make any financial decisions.