“Calm” always pays in investing

Market crashes such as the one experienced earlier this year at the onset of the Covid-19 pandemic are psychologically testing even for the most seasoned in¬vestor. Investors are always tempted to cash out from riskier assets to stop losses. But history shows that in¬vestors who remain invested through the storm tend to fare better than those who bail out. 

 The graphs below illustrate why staying invested in di¬versified portfolios during market crashes is always the best thing to do. We illustrate this using two hypothetical in¬vestors: Calm and Panicky. The two investors invested R1,000 each into a balanced portfolio with 60% in SA equities and 40% in South African bonds some months before the financial Covid-19 market crash as well as the 2008 Global Financial Crisis market crash. Calm kept her cool and remained invested in the balanced portfolio while Panicky panicked and cashed out at the peak of the crisis. We also assume (simplistically of course) that Panicky will only re-invest his cash back into the balanced fund at some point when markets stabilise.

In both graphs we can see that Panicky always ends up worse off than Calm. In the 2020 scenario, Panicky’s portfolio ends up far below Calm’s. In 2008 where there was kneejerk recovery in markets, Panicky was ahead for a bit but eventually lost out because of poor timing.

“In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.” – Benjamin Graham