How You Can Feel More Comfortable Picking up Bargains during Market Downturns

In the last major financial crisis of 2007-09, many stock markets around the world were hammered. For instance, the S&P 500 in the U.S., the FTSE 100 in the UK, and the Nikkei 225 in Japan each fell by close to 50% or more from peak-to-trough. In Singapore, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market benchmark, the Straits Times Index (SGX: ^STI), crashed by two-thirds in value.

With the severity of these market declines in those tumultuous times, it’s easy to imagine that the majority of investors were selling stocks en masse – and that would have made it that much harder to pull the trigger for those wanting to pick up bargains back then.

That’s because, as financial advisor Carl Richards says, “We’re social animals who feel safer in numbers… We take comfort in doing what everyone else is doing, and in the back of our minds, we know that even if we’re wrong, at least we’ll be wrong with a bunch of other people.”

But recently, I came across some stunning statistics from U.S.-based ETF provider Vanguard about its investors that seems to upend the accepted conventional wisdom that most investors are selling in droves during market panics. Steve Utkus from Vanguard wrote in August 2011 (emphasis mine):

“In the first eight trading days of August [2011], including two of the most volatile days since 2008, just under 2% of 401(k) [a retirement savings plan in the U.S.] participants at Vanguard made a change to their portfolios. In other words, over 98% stayed the course. Ninety-eight percent took no action. Ninety-eight percent took the long-term view.

Now it’s true, if choppy markets continue, we’ll see this number inch down. Ninety-eight percent of participants staying the course might become 97%. In October 2008, during the depths of the financial crisis, it became 96%—in other words, 4% of participants made a move. But the fact remains: those trading are a very small subset of investors.”

At this point, an important question might naturally arise for you. If Vanguard’s investors are a broader reflection of what’s going on out there in the market, how and why do prices fall that much during panics? I don’t have an exact answer to the question, but my colleague Morgan Housel once gave a cogent explanation:

“Market prices reflect the last trade made. It shows the views of marginal buyers and marginal sellers – whoever was willing to buy at highest price and sell at lowest price. The most recent price can represent one share traded, or 100,000 shares traded. Whatever it is, it doesn’t reflect the views of the vast majority of shareholders, who just sit there doing nothing.”

I’ve not come across similar statistics as above about investor behaviour from fund houses based in Singapore. But if Vanguard’s investors are any indication of what the majority of investors are actually like in Singapore – even after accounting for cultural and structural differences between American and local investors – then we should realise that most investors might not be selling their stocks in a panicked-stampede when the markets decline. Most are staying pat, and like Utkus says in his article “others actually buy stocks as the market is falling.”

A Fool’s take

I’m not saying it’s always right to follow the crowd when it comes to investing. But in the context of picking up bargains during market panics or corrections, it might just become easier for us to invest if we keep in mind that it’s not the majority of investors who are selling, given that humans are social creatures and find solace in doing what the crowd does.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.