Is Staying Invested Really Beneficial?
Most investors have exited the financial market due to the Coronavirus pandemic followed by the Russia Ukraine crisis that has swamped profits. The stock markets have been lower than ever, with Nasdaq linking by 3%, Sensex dipping by 303 points, Dow Jones dropping by 2% and FTSE 100 sliding under a 7,500-marking point, to name a few substantial market indexes. It will be correct to say that investors are facing a stock market crash in 2022.
However, investors exiting the markets are probably not aware of how financial markets work, and history is proof. All falling markets see the day of light as markets pick up as fast as they drop. This article will talk about how perseverance and patience are essential in staying invested in the market even when it is a temporary bearish phase.
Stop trying to time all your investments
Most traders exit the market to minimise their losses. However, little do they understand that they actually inflate their losses even more by doing this. You have already lost as much as you could during a stock market crash, and selling off at this loss is not an intelligent decision. Instead, having lost it, as difficult as it may seem staying invested, you should have the strength to continue in the bear market and wait patiently for the markets to pick up because, in the near future, they will, just as the markets crashed but normalised in the 1929 great depression, 1987 black Monday, 2001 dotcom bubble burst, 2008 housing crisis and the 2020 pandemic.
It is not the ideal to time all your investments every day, especially in such volatility, as it might lead you to take irrational decisions. The best chance given to investment is to leave it for the long term and forget about it during times of crisis.
Staying invested in a falling market is definitely not easy and much more of an emotional turmoil where your hard-earned money is at stake, but staying invested is the right decision, as research also says. The best investment approach is the long haul. Staying invested in your current portfolio during bear markets can lead to a four times portfolio expansion as and when markets pick up. The study also shows that when you are invested in a portfolio for about two decades, you earn annualised returns close to 8%.
How can you lose money by exiting early?
When you exit the market only to avoid the worst market days, you lose out not only on your principal amount since the total value of your portfolio declines but also on the potential profits that the market is able to give you when it picks up. Cashing out looks like a relief, but it actually does more harm than good. You think about reinvesting later, but the fact is, when markets pick up, you are hardly able to repurchase even half of your portfolio from the money you cashed out. If you dodge the lows in the markets, you will most likely miss out on the highs.
Benefit of hindsight
The benefit of hindsight refers to the potential you can reap out of a market situation after assessing the downturns and calculating the potential upturns. Once the markets have already dropped, you know the worst that can happen as it is in front of you. This gives you an opportunity not to act according to an investor but to the market.
The current benefit of hindsight is that the entire world now knows how Covid 19 can or has impacted the world economy and how far it can go. As fast as equity markets dipped, they returned to their initial stage and performed even better than before, reaching new highs just three months after touching all-time lows. This proves that each crisis is temporary, and only the demand and supply function keeps the market up and running.
Utilising the information and considering hindsight, one can actually profit off the short term volatility as well and continue to remain in a prolonged position with a long term investment perspective. It may not be the easiest to bear the temporary losses. Still, it is vital that investors look past the noise and focus on the greater good, the long term aspect of investing in incredibly well-performing assets. Hence, it is crucial to remain invested even during times of market stress to ensure that you are in the investment game for the long run.
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