It’s been a rubbish year for markets – and us lot! A rather nasty cocktail of inflation, ongoing supply chain issues (keeping inflation ridiculously high), tip-toeing on a recession – oh and a war that’s still going on. Put that altogether and you get bucketloads of uncertainty. Mr Market’s enemy. It’s little surprise that this year has been more akin to a horror movie than a Disney fairytale.
Our portfolio’s have tanked this year and it doesn’t feel good. But think it’s just stocks that have gone down – guess again! Bonds have decided to put on a show of solidarity and they fell too. Having stocks and bonds go down at once has only ever happened a handful of times. And they call bonds a portfolio diversifier! Now that’s a joke. The great big bond bubble is popping and it’s causing max pain. Case in point: the Bloomberg Global Aggregate Bond index is down ~15% from its high in January 2021. And guys, this is meant to be the safe stuff btw.
If you really want a laugh look at the top 3 performers by country this year: in first place: India’s BSE SENSEX with a YTD gain of 2.71%, in second place: London’s FTSE 100 with a loss of 5.02% and in third place: Tokyo’s Nikkei 225 with a loss of 6.31%. Having the smallest loss is now considered a win! Topsy-turvey world guys. You’ve been warned.
Inflation keeps on inflating
But what’s really got us biting our nails is the fact that inflation is proving to be so so stubborn. It’s like trying to remove gum from the ground. Apart from it being grossly gross it’s also 99.999% impossible. Don’t try this!
So now you understand the mess that markets (and clearly investors) are finding themselves in! When markets fall sorry, – crash! – as they’ve so recently done (and continue to do so by the looks of things) you might get the urge to want to shut it all down. Like, now. To sell your stuff, pack your bags and never return. And for a good chunk of investors (some new, some not-so-new), this is exactly what they did.
Ally conducted a survey from those who sold their investments (psst: Ally has loads of really interesting surveys on this topic so check them out – only if you’re curious!) and found that 21% were millennials and Gen Z investors btw and they found that nearly 40% sold some or all of their investments because of inflation and 31% due to fear of losing yet more money.
What’s even more interesting is that of the 21% who closed their brokerage accounts, 23% of millennials and 15% of Gen Zers wished they’d have invested more and around 15% of each group regretted selling their investments. The figure isn’t higher since I bet markets have fallen since they sold! But the remorse is clearly there nonetheless. When markets go up, they’ll wish they could hit ‘undo’ and magically make their portfolio come back. Sadly, that’s not how it works. Investing is a lot like relationships! If you can’t handle the bad times, you don’t get to be there for the good times.
The 31% of folks who sold out were scared they’d lose more money. But the thing about stock market volatility is that it really is the price we pay for long-term returns. It’s all part-and-parcel of the investment journey. The greater the volatility, the greater the potential reward.
The 21% of investors who closed their brokerage accounts couldn’t stomach the volatility. Or more specifically, what they couldn’t stomach was the fact that this swing (down) in stock prices and chewed off so much of their life savings.
Needing the money pronto….
But maybe these guys who closed their accounts weren’t able to invest for donkey years. Maybe they needed the money. Pronto. And they didn’t (or couldn’t) really wait for markets to recover. But this really is the danger of investing without a reasonably long time horizon. People like to say > 5 years but to me, seems too short. Think 7-10 years instead. If your financial situation means you need access to the money earlier, it shouldn’t be sitting on the stock market. It should be in a savings account.
Of the 40% who closed their brokerage accounts due to soaring inflation (someone make it stop!!) perhaps they were investing money that they couldn’t actually afford to lose. If you’re having to take money out your investment account to use day-to-day, it probably it shouldn’t be there in the first place.
It’s prudent to always have some cash on the side for emergencies, between 3-12 months’ worth of your salary. Using this money when you can’t afford your bills thanks to inflation makes sense rather than whipping out of your investment account at a time when markets (and share prices) are already depressed. Emergency savings are there to be used, not to keep your bank account warm.
Inflation and general surge in the cost of living has meant that not everyone can afford to keep ploughing into their investment accounts and with stocks falling month after month, it almost seems wasteful to put money into market that you really need.
You know the saying that you shouldn’t invest more than you can afford to lose – this happens when people need access to their money in less than 5 years. So it’s no surprise then that when markets seriously stall, investors can get seriously spooked and sell. After all, if they desperately need the money soon, why risk holding onto it. Might as well cut your losses and move on.
We’ve been there before
High inflation, stock market volatility and geopolitical conflict have all happened before! And that shouldn’t stop you from investing. By selling when the stock market dips, you convert your paper losses into real ones and then there’s no going back. You’ve not given your stocks a chance to recover.
The only problemo, for us young Gen Zers, we weren’t exactly around during periods of market turmoil, high inflation and all that. At least not when we were old enough to remember. I was a kid back in ’08 so I was totally oblivious to the financial carnage that was going on around me.
People who were old enough to remember the 70s saw inflation with their own two eyes. The same can’t be said for us who have to flip through history textbooks to find out about this. So talk to your old folks and get their perspective on inflation. I bet they’ll have some stories for you.
But in the meantime, sit tight and try not to don’t abandon your investments.
One day you’ll regret it. And that is your future you’re selling. So ride it out, by staying in the markets for decades you’ll be able to enjoy the markets’ good days that will soon come around.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
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