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 before they are exposed to additional damages. In most scenarios, this is 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?
Why do investors react this way?
Behavioural science suggests the first thing to do when experiencing the anxiety described above is to acknowledge that it is a perfectly natural reaction for all investors, even the most experienced. It is, without a doubt, an unnerving experience to watch the value of an asset fall. 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 that the market will stabilize and recover 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. 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.
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. If you feel the temptation to sell, try to remember that historically, the data is on your side, and it's 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.
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 most of your assets tied up in investments and you are likely to need access to cash in the short-term, 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.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist advice on this matter.
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The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.