We all know who ultimately wins the tale of the tortoise and the hare, so why is it so many of us are still getting it wrong when it comes to investing, and losing the race to greater profits?
Our parent company, Quilter, found some alarming investor behaviours during the market crash of February and March 2020. As a result, they have identified four types of investor, judged by how they reacted to falling markets.
- The tortoise: Happy to leave its investments untouched and plod a steady course despite the market chaos going on around them. Ultimately will be well rewarded for a safe strategy.
- The hare: Tries to be clever with its money and take advantage of markets falling and rebounding but gets the timing horribly wrong.
- The ostrich: Bolts away from the supposed danger, sells investments once markets fall and then sticks its head in the sand, leaving things untouched. Will only start investing again after markets return to pre-crisis levels and things appear calm.
- The squirrel: Keeps calm and continues to add to its investment stores even in the darkest of times when markets are falling, knowing it will reap the rewards when the sunshine returns.
Why the hare and the ostrich get it wrong
The hare, in rushing to a snap decision of moving into cash, often ends up getting it wrong and selling at the bottom of the market. Its money might be comparatively safe, but it won’t benefit when the market starts to bounce back up; ultimately joining in the recovery too late to profit.
The ostrich has moved into cash and refuses to listen to advice. Surely it’ll be fine when it’s all over and the market has returned to where it was before the crash? Unfortunately not; by then, buying back in will cost much more and it will have already lost all potential for profit.
So who are the winners?
The tortoise is a wise old reptile and doesn’t rush into anything. It’s seen turmoil come and go and knows that time is on its side. Ultimately, by staying invested, it will be well rewarded for its calmness and long-term strategy.
The squirrel might just be the shrewdest of them all; not just leaving its investments untouched, but continuing to drip-feed more in. When better times return, it’s likely the squirrel will be the ultimate winner.
Those who stayed invested will have benefited the most
Quilter looked at a portfolio invested in global equities. It analysed the returns on offer if you:
- left your money invested during the Covid-19 sell off
- sold at the bottom and only reinvested following a 10% recovery
- sold at the bottom and waited for markets to return to pre-crisis levels
- were able to sell at the top and buy back at the bottom – a notoriously difficult strategy.
Quilter found that an investor who did nothing during the market crash would have seen their portfolio go up an average of 7.6% since the crash, compared to heavy losses for those who moved to cash.
Investors who tried to shelter from the turbulent market by moving to cash, before reinvesting, suffered greatest, with 2020 returns still in negative territory.
The difference is even more stark over a five-year period
Quilter’s research also looked at the possible performance of the same portfolio over a five-year period. It found that those who failed to remain invested would potentially have missed out on up to £5,333.
Keep a level head
It’s important people keep a level head during times of market distress. Stock markets have proven to be incredibly resilient over the long term, yet there are people out there trying to time markets despite it being a nigh on impossible strategy.
Selling investments and waiting until markets returned to pre-crisis levels before putting money back in the stock market has proven foolhardy and will only prolong the pain.
Cash is no longer the safe haven people once considered it. While it’s important as part of an overall portfolio allocation, having too much can cause a significant drag on the returns of other investments. Interest rates remain at paltry levels, so it is important to leave money invested for as long as possible to achieve the best results. As we can see from our scenario, it pays to be more like the tortoise and the squirrel.
An AAM Advisory wealth manager will help you to identify the most suitable way for you to make the most of your cash. Together you’ll be able to define your aims as well as formulate a personalised plan.
This article is intended for general circulation and for information purposes only. It may not be published, circulated, reproduced or distributed in whole or part to any other person without prior consent of AAM. This article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any products mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed wealth manager regarding the suitability of the investment product before making a commitment to purchase the investment product. Whilst we have taken all reasonable care to ensure that the information contained in this article is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this article is subject to change without notice. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data. AAM Advisory Pte Ltd is licensed by the Monetary Authority of Singapore, FA Licence no 100032.
Book a complimentary financial review with one of our wealth managers.