Warwick Wealth Eastern Cape Regional Manager, Rudi Oosthuizen examines
these two financial animals.
Investment behaviour is based on two main drivers, fear and greed. In this article we will focus on the first, namely, fear and specifically why it is important to fight the urge to sell out when the market nosedives.
By definition, a bull market is one that is on the rise and where the economy is sound. By contrast, a bear market exists in an economy that is receding, and most stocks are declining in value. In recent times, we have experienced several bull and bear markets. The 2008 global financial crisis and Covid- 19 pandemic in 2020 are two major events in the last 20 years that had investors panicking and wanting to run for the hills.
But for perspective, let’s look at the JSE All Share Index during the 2020 Covid Pandemic:
On Monday 17 February 2020, the All-Share Index stood at 57 794.57. On Monday 16 March the Index fell to 39 783.94. This meant that seven years’ worth of growth was wiped out in the space of a single month. Many investors felt like the like the end of the world had come and that this downward spiral in world markets could continue indefinitely. Panic caused many an investor to cash in their investments and pensions. Despite this, “Do nothing and remain invested!” – was the advice given by Wealth Specialists and Financial Planners.
The chart, right, paints the clearest picture of market recovery from the 2020 Covid-19 pandemic lockdown for investors.
Investors who followed this advice and stayed invested in the JSE All Share subsequently experienced a bull market that lasted until the end of January 2021. Indeed, so swift was the recovery that on the 17th of August 2020 the All Share was at 67 289.68. This represents a 69% recovery in growth over a five-month period and 16% higher than the All-Share Index before the market downturn.
So, while I agree that the Covid Pandemic was a ‘Black Swan’ event, the principles of remaining invested in turbulent times demonstrably still hold. This is borne out by the performance of the markets depicted in the table, right.
Taking a longer historical perspective, if one looks at the All-Share Index over a 28-year period (1996 -2023), you notice how many more bull markets form part of the graph compared to bear markets. The general trend of the graph is certainly upwards.
Many investors become fixated on the bear market over a short period of time, but the reality is that this is merely a snapshot. By selling out at the bottom of the market the investor is guaranteed to convert a paper loss into a real loss. One can only have the opportunity to make up losses in the market by staying invested, and certainly not by trying to time the market.
It goes against every instinct not to panic when an investor experiences losses in the market, but staying invested in a market downturn provides the opportunity to benefit from the ‘bounce’ when markets turn. And history tells us, they always do!