If you haven’t already heard, Singapore’s stock market is in bear market territory – a bear market is defined as one that has fallen by 20% from a recent high – at the moment, with the Straits Times Index (SGX: ^STI) having slipped by 21% from a 52-week peak that was reached in mid-April this year.
It’s likely that many of you who are investing are staring now at a portfolio that’s chocked with losses. That’s tough to deal with and some of you may even have harboured thoughts of selling your investments to wait out the storm.
Thing is, selling when stocks have fallen may be one of the worst things you can do. Here’s why:
Source: John Maxfield, Fool.com
The chart above is, in my view, the most important chart investors have to see now. It compares the average US equity fund investor’s returns for rolling 20-year periods (the 20 years ended 1998, 20 years 1999, 20 years ended 2000 and so on) to the returns of the S&P 500, a US stock market index, for the same timeframes.
What it shows is stunning: Investors in the US have badly underperformed the stock market for many years. DALBAR, the investing research outfit that came up with the data used in the chart, attributes the phenomenon to investors’ propensity to buy and sell their investments at the wrong times.
Said another way, investors had been guilty of buying high and selling low. Had they simply held on to what they had, they would have been better off.
DALBAR’s study is hardly an anomaly. David Swensen, the highly acclaimed long-time chief investment officer of Yale University’s US$23.9 billion endowment fund (as of 30 June 2014), cited similar statistics from investing research house Morningstar in a guest lecture in 2008.
Swensen recalled that Morningstar once did a study on the 10-year returns of 17 different categories of equity mutual funds in the US (mutual funds there are analogous to unit trusts here). Turns out, investors in the funds from all the categories had dramatically underperformed the funds themselves – the worst category saw investors lose to their own funds by 13.4% per year on average!
In a similar vein to the DALBAR study, Swensen mentioned that the large discrepancies between investment and investor returns that Morningstar discovered had happened because investors (emphasis mine) “had bought after the funds had gone up, and they sold after the funds had gone down.”
As I mentioned earlier, we’re in a bear market at the moment in Singapore and that likely means that most of your investments (mine as well!) are down. But, panic-selling here won’t do you any good – it’s important to remember that frequent buying-and-selling is a big reason why investors often lose.
It hurts to sit on losses now in a bear market. But, if you had invested in fundamentally strong companies in the first place, it may pay for you to keep the faith that tomorrow will be a better day.
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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.