Table of Contents
The average investor generally makes bad decisions
You have to face it: getting the best entry and exit times right is impossible.
Why is it a bad decision to stop investing in periods of uncertainty?
Trying to get the market timing right is really very difficult.
The investor who enters and exits the markets without a system still achieves worse results
To reduce risk, it is better to invest regularly.
So what should you do in these situations?
Appendix
Why have we given importance to this period?
The average investor generally makes bad decisions
Although it is difficult to understand and may even be counterintuitive, experience shows that being able to overcome market volatility and remain invested for the long term has ebay phone number data generally proven to be the most effective way to maximize returns on our investments.
Source: JP Morgan Asset Management
The table above shows the APRs for various classes of financial assets from 2001 to 2020.
We are interested in drawing attention to the following:
A 60/40 portfolio, in light blue (60% stocks/40% bonds) would have earned an APR of 6.4%.
A more cautious portfolio with 40/60 in darker blue (40% stocks/60% bonds) would have earned an APR of 5.9%.
In contrast, the average investor (in orange) earns only 2.9% in the same period .
This is 3 to 3.5 percentage points less, and around 50% less than what the average investor could have obtained in one or the other portfolio.
This last data is provided by Dalbar Inc. and shows that the average investor generally makes bad investment decisions, one of which is to stop investing in periods of uncertainty .
You have to face it: getting the best entry and exit times right is impossible.
It is impossible for an expert investor and even more so for an inexperienced one.
Let's take an example: A few days ago, it was certain that central banks would start raising interest rates to control inflation. With Russia's invasion of Ukraine, there are now many who believe that the Fed will no longer be able to do so. A few months ago, some were reconsidering their positions for a rate hike scenario, which is now in doubt. But what the Fed will do in the end is unknown. This is because no one can predict, for example, geopolitical events such as the one that is happening right now.
Why is it a bad decision to stop investing in periods of uncertainty?
As difficult as it may be to accept, financial markets are bound to uncertainty .
There is a popular saying that says “nothing ventured, nothing gained” and this is fully applicable to financial markets: “there is no return without risk” .
It is common for inexperienced investors to become frightened in times of volatility or declines and stop investing, trying to guess the best time to exit.
The statistics we saw above show that the only thing this produces is a loss of profitability.
Portfolio visualizer source: Evolution of a “ Buy & Hold” investment versus the moving average technique in the S&P500 from 2010 to the beginning of 2022.
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Trying to get the market timing right is really very difficult.
It is difficult because, as we have said, there are unpredictable events and predictable ones are not always easy to interpret, even for the most expert analysts.
Alternatively, we can look for other more or less systematic methodologies, but these do not guarantee success either. To illustrate this, we have carried out a study: let's imagine an expert investor who uses one of the best-known methods for finding the best time to enter and exit the markets: the use of medium-term moving averages.
The downward crossing of the moving average with the price gives us exit signals. While upward crossings give us entry signals.
As we can see in the graph above and more fully in the table above, as for the three cases analysed (S&P 500 index, MSCI World index, and a 60/40 portfolio), specifically, in the period 2010 to 2022, the investor who buys and holds (known as " Buy & Hold" ) generates higher returns and a better Sharpe ratio than the expert investor who uses the moving average method.
The message we want to highlight is that if using a strict methodology it is no longer possible to improve the " Buy & Hold" imagine what happens to the inexperienced investor.
The investor who enters and exits the markets without a system still achieves worse results
This panic-driven investor almost always exits at one of the worst times and very often does not re-enter or enters when the market has fully recovered, missing the strong rebounds that occur after sharp falls.
That is, sell cheap and buy high, just the opposite of what is desirable, buy low and sell high. If we do not need the invested capital, stopping investing in times of uncertainty is generally a big mistake. However, it is worth remembering that the money that we do need in the short term or our emergency fund should never be invested.
When we ask about the horizon and the bearable short-term time loss in the process of registering our clients, we are not asking in vain.
After Russia's invasion of Ukraine, we may be tempted to exit the market or, on the contrary, make aggressive bets. History shows us that impulsive decisions are often wrong. Especially if our financial circumstances have not changed, in particular our goal or horizon.
