Was “let’s sell for now and wait for the dust to settle,” one of your mantras during the last market shock? Diego Wuergler, our Head of Investment Advisory, explains the common mistakes made during a crisis.
Mistakes. Sometimes they come down to individual decisions. Often, they are as simple as financial advice gone wrong.
Here are my top five common blunders that investors may encounter during a crisis:
Mistake 1: “Let’s sell for now and wait for the dust to settle.”
The equivalent for cash-rich investors would be “Let’s keep the cash and wait for the dust to settle”. The S&P500 has rebounded by more than 108% since its low on March 23, 2020 and most investors that have not bought are still in waiting mode.
An alternative view: Instead of waiting, it is much better to build a solid exposure structured around well-defined investment themes, such as the US market. Potential winning infrastructure sectors might include IT & Communications, Healthcare, and Industrials. Other attractive opportunities may also be found within the Financials space.
Mistake 2: “The market is wrong.”
No, it is not. It is us as individuals who are wrong. At any point in time, the market simply discounts all public information available (the fundamentals) as well as investors’ psychology (momentum).
An alternative view: Never fight a trend. Most of the time, we understand several weeks/months later why the today’s market trades at current levels. It is better to listen to what the market has to say to us and only when a trend changes should we adjust accordingly. The current secular bull market started in May 2013. On average, this period lasts 16-18 years.
Mistake 3: “This time is different.”
No, it is never different. We may have felt this way because we were recently experiencing an unprecedented experience due to the pandemic, but the context is always different. In 2000, it was all about sky-rocketing valuations. In 2008 the financial system (not the market system) was falling apart.
An alternative view: What never changes is our behaviour or our reaction, which is always based on greed and fear. Today it is fear that guides our feelings and this bodes well for the continuation of the bull market. Always remember: bull markets end with euphoria, not fear.
Mistake 4: “I cannot sell this stock at such a loss. Let’s keep it for a while and see what happens.”
Avoiding a loss (and keeping zombie stocks) is one of the worst strategies ever, in my opinion. Normally, “what happens next” is absolutely nothing as these stocks go nowhere. An unrealised loss is still a loss. The best way to quickly recover from previous losses is to make sure that what we own now will outperform in the future.
An alternative view: A crisis changes the world. It clearly defines winners and losers, so be quick at selling the losers. Don’t keep the cash but reinvest into structural winners.
Mistake 5: “Buy low, sell high.”
On paper this looks great. In reality, you know when a stock was low and when it was high (e.g. when to buy and when to sell) only after the fact. Particularly in a positive market environment, you tend to have a contrarian approach and only buy stocks that trade at a low level. Unfortunately, they often trade low for a good reason so you buy what you should avoid (see mistake 4). Alternatively, what’s much worse is that you may wait for the perfect moment to buy low and then you never buy.
An alternative view: A much more effective strategy is to “buy high, sell higher”. If this is the right stock within the right investment theme, it is not that important if you buy it at a “high” level.
A market shock is challenging. Don’t make it worse by following these five common misconceptions.