What should you know?
As investors, we all know the old adage “Buy low, sell high”. Unfortunately, human emotions do not work like that.
The chart below highlights flows into and out of US equity funds and ETFs (shown in blue), versus the performance of the S&P 500 (the grey line) since 1995:
The trend is clear, large outflows occur right when markets hit the bottom of a temporary decline.
To put this another way, many investors do the exact opposite of what they should do, they sell, rather than buy, when markets are low.
Why should you care?
It’s an understandable emotional reaction. Selling investments and moving to cash deposits when markets are falling and panic is spreading can feel like the right thing to do. As humans, we are wired to run away from what we perceive as dangerous.
However, the fact is that by selling, you ‘lock in’ losses and turn temporary declines into permanent setbacks. When the positive sentiment returns and markets start to recover, you miss out on the rebound.
There is no denying the excellent long-term returns of investing in equities. You must remember though, you will only benefit from these returns if you remain calm and resist taking impulsive decisions along the way.
