Selling the Market Low: Like Closing the Stable Door After the Horse Has Bolted

Data estimates that approximately 18% of investors sold all their shares between February and May

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Jun 19, 2020
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The great investor Peter Lynch once said: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

In a similar vein, I would add that far more money has been lost by investors panicking about stock market selloffs than in stock market selloffs themselves. And yet, every time there is a market crash, many investors invariably panic. Let’s look at some recent data that illustrates this.

Too little too late?

A recent article in the Wall Street Journal revealed that 18% of all investors with a Fidelity brokerage account sold all of their equities between February and May of this year. Almost a third of investors over the age of 65 did likewise.

Selling stocks after the market has crashed is like closing the stable door after the horse has bolted - the damage has been done, and those same investors are likely going to buy back into the market at a higher price.

Now, it’s not entirely fair to say that all investors who pulled their money out of the market in March were acting irrationally. While it’s true that historically selling stocks after a market crash leads to much lower returns than just waiting it out, for many in the 65+ age range, waiting is simply not an option, particularly for those who rely on their retirement portfolio for their day-to-day income. They also cannot afford to risk further declines in the value of their portfolio.

However, older investors tend to have a smaller percentage of their money in stocks compared to bonds, so in that context, the decision to sell everything seems perhaps driven by fear as well as by rational considerations.

Still, that 18% figure seems high. This isn’t just investors who sold some stocks - they sold 100% of their equities. Selling during a market correction requires you to be right on two counts: that you are not selling the bottom, and that you will be able to buy back into the market at a lower price once the outlook becomes clearer. Realistically, it is unlikely enough that you will get even one of these decisions right, let alone both.

Warren Buffett (Trades, Portfolio)’s famous quote “be greedy when others are fearful” has become a cliche, but it is a cliche for a reason - emotionally-driven decisions are almost always the wrong ones.

Disclosure: The author owns no stocks mentioned.

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