Is staying the course best during a market crisis?

Historical analysis suggests that investors who buy or sell in volatile times end up being worse off

Is staying the course best during a market crisis?

“Don’t just do something — stand there!”

That may sound like odd advice during times of volatility. But if they could avoid the temptation to cut their losses, investors that put those words into practice might end up being better off.

In its 26th Annual Quantitative Analysis of Investor Behavior, financial services research firm DALBAR looked at 10 historical periods of market crisis since 1984, and compared investment outcomes for investors who took action by buying or selling with those who simply stayed the course.

As reported by ThinkAdvisor, the study found that 70% of average investor underperformance occurred during those 10 crisis periods when investors acted instead of just riding the turbulence out.

And during those 10 worst cases of underperformance that occurred between September 1986 and October 2008, investors would have seen better returns as soon as one year later 80% of the time if they had just stuck to their positions.

In the case of the 2008 Global Financial Crisis, where the market lost 30%, investors who just held on would have been able to fully recover by 2010.

Simulating a buy-and-hold investment of $100,000 that earned returns in line with the S&P 500, DALBAR found that it would’ve out-earned the average equity investor by:

  • $25,515 during the period from 2016-2019;
  • $16,228 during the period from 2017-2019;
  • $12,129 during the period from 2018-2019; and
  • $5,936 during 2019

A major problem for many investors, according to the study, is the influence market forecasts have on their investing behaviour. “These opinions serve to maintain the investors’ awareness of unpredictability, thus increasing the vulnerability to market changes,” DALBAR said.

The upshot for most, it said, is that they respond to market declines by withdrawing, which “is only productive if additional declines occur.”

Those who can’t avoid taking action during a crisis, the study said, should consider taking out portfolio insurance — purchasing index puts that would protect them from a downturn and let them participate in an upturn. In the case of the stock-market collapse in October 1987, it found investors who purchased portfolio insurance would have seen better results after a year than others who pursued “the more costly and imprudent course of a full withdrawal.”


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