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Why it pays to hold your nerve: Investors lose thousands by selling when markets crashed

Date: 16 June 2020

We all know how volatile the markets have been since the start of the Covid-19 crisis and it has proven to be a big test of investors’ nerve. Now, new analysis from Quilter has shown that investors who sold when the market hit bottom in March will have lost significantly more than if they waited until the end of May.

This research backs up the long-standing principle that those who remain invested in difficult times tend to ride through the volatility more successfully – long-term investing smooths out the ups and downs.

Benefiting from recovery

We looked at some key Investment Association sectors which revealed that, depending on the asset class, retained investments would have recovered anywhere between 9% and 19% since the bottom of the market, which for most sectors was on 19 March.

For example, someone who had £100,000 invested at the beginning of the year and was invested in an average fund in the IA Global sector would have since seen their investment drop as low as £78,645. However, since then it has recovered to £98,159 at the end of May. You can see further examples of drops and recoveries below.

Fighting the natural urge to panic

Rationally, we know that, if we ride out the periods of decline in the market, investments will recover. But it isn’t easy to remain rational when you start seeing your investment value dropping by hundreds and then thousands of pounds. It’s a known fact that we feel the pain of losing what we already have more than we feel pleasure in gains. If acted upon, this natural aversion to loss can cause the greatest detriment to investors.

It’s therefore important to remember the purpose for investing in the first place and to look at the whole picture rather than just last night’s negative headlines.

Learning to cope with these emotions is something all investors need to do. When we see our portfolio value plummet, we need to be able to resist the natural temptation to run and sell when prices are low.

A financial adviser can help you find the best investments for your current stage in life and also help you stay the course of investing when your instincts are telling you to jump ship.

Don’t forget, that the value of any investment may go down as well as up and you may not get back the amount you originally invested.

The chart shows the value of £100,000 portfolio (fully invested in each Investment Association sector as at 1 January 2020) at a market low as at 19 March 2020, and its subsequent value as at 29 May following a market recovery. No withdrawals were taken during the period. Net of any fees.

The chart shows the value of £100,000 portfolio (fully invested in each Investment Association sector as at 1 January 2020) at a market low as at 19 March 2020, and its subsequent value as at 29 May following a market recovery. No withdrawals were taken during the period. Net of any fees.

Mixed Investment 0-35% Shares: Up to 35% of the fund can be invested in company shares (equities). At least 45% of the fund must be in fixed income investment Value of portfolio during a market low point as at 19 March

Mixed Investment 20-60% Shares: The fund must have between 20% and 60% invested in company shares (equities). At least 30% of the fund must be in fixed income investments.

Mixed Investment 40-85% Shares: The fund must have between 40% and 85% invested in company shares. No minimum fixed income or cash requirement

Global: Funds which invest at least 80% of their assets in a diversified mix of global equities.