MENU

Why Stock Market Participants Are Selling Stocks Right Now

It is said that bull markets take the stairs, but bear markets jump out the window.

On Monday, the Strait Times Index (SGX: ^STI) fell by 4.3% to touch the 20% decline-mark from this year’s peak of 3,550 points that was set on 16 April 2015. The severity of the fall may even lead to some to refer to it as Singapore’s own version of “Black Monday”.

(For more historical context, 19 October 1987 is the date of “Black Monday,” an episode when major U.S. market indices, like the Dow Jones Industrial Average, crashed by more than 20% in a single day.)

Why is everyone selling?

Against this backdrop, it would not be a stretch to say that stock market participants have been selling their shares en masse in recent times. And yet, the behavior in rushing for the exit doors may not be new. Psychologists refer to this bias as loss aversion.

Author and financial advisor Carl Richards has a simple explanation of this bias in an article of his:

“We feel the pain of loss more acutely than we feel the pleasure of gain. In other words, we may like to win, but we hate to lose.”

The aversion to losses has another side effect. The bias may also cause us to remember only the big losses like “Black Monday” but forget the more important view – and that is, the long term returns of the stock market.

My colleague Morgan Housel captured this particular dissonance in his tweet below. 2015-08 MH Tweet

A Fool’s take

Market crashes are not fun to experience. But when we zoom out and take in the larger view, it may become apparent that it is the longer term returns of the stock market that matter more.

What would you prefer to remember?

Read more about investing and get more investing tips and tricks, FREE! Sign up here for The Motley Fool Singapore's weekly investing newsletter, Take Stock Singapore. Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.