We speak frequently about our philosophy behind investment management and financial planning and advice. Our approach is objectives based. That means the investment recommendations and advice we provide our clients is focused on the optimal way for you to achieve your goals. What it is NOT focused on is the latest hot trend, the next big thing and what’s happening in the market in any particular week.
The reality is though, that for many people when it comes to managing their money, it is hard to resist reacting to the latest market news. There is a trade-off between being informed, having access to information about financial markets, the economy and your investment portfolio, and not being reactive. For some, there does seem to be an inverse relationship between the frequency at which they check and adjust their investments and the long-term returns they achieve.
We always advocate focusing on long-term goals. If your target is short term, you should probably not be invested in structures that are subject to volatility.
If you are a Black Swan Capital client or have attended one of our webinars or events, you will have heard us say that over time markets will go up, but not in a straight line. Along the journey markets, and therefore investments, may go up or down.
As we have spoken about the perils of trying to time the market, there is new research out that captures who is most likely to react to market downturns, or what the research calls, ‘freak out’.
Their research was published in the article When Do Investors Freak Out?: Machine Learning Predictions of Panic Selling. If you want to read the article, click here. The researchers from MIT reviewed data from 635,455 brokerage accounts across 298,556 households and established when people react when they ‘freak out’, and who is most likely to freak out. For the researchers freaking out meant making panic investment sales at times of sharp market downturns.
Who is most likely to freak out?
The research found that the attributes of the investor most likely to freak out were:
- those that self-identify as having excellent investment experience or knowledge
- investors who are male
- or above age 45
- or married
- or who have dependents.
One of the most interesting findings from their research was that it was those that believed they had superior knowledge or experience that were more likely to panic sell.
The research went further. Having identified who is most likely to freak out, they looked at the impact of their panic selling on their portfolio returns. Interestingly, they found that these investors typically waited too long to reinvest, causing them to miss out on significant profits when markets recovered, as they inevitably do. It is a reinforcement that one cannot time the market and that there are losses to be had in the form of opportunity cost- which the researchers measured- relative to having remained invested and moved with the market volatility. In short, staying long-term focused produced better results than panic selling and trying to time back into a market. This has been said for many years, and it is valuable to see it supported through quantifiable academic research.
It is a salutary reminder for all investors, as markets continue in a volatile fashion, that long term objectives are more important than short term market movements and that the key question an investor should be asking is whether their investment portfolio remains aligned to their strategy and objectives. This question is relevant irrespective of the stage of the market cycles and is the key focus of our client review process.
When should you not panic sell?
At any point in time, whether markets are going up, down or sideways. Instead, get good advice. The decisions about selling investments, buying investments and continuing to hold investments should be made in the context of what you are trying to achieve and by when.
If you want to discuss your investment portfolio, your objectives, or you would like to start the process, contact us at [email protected].