Why Panic is Rarely the Best Investment Strategy: Insights on Market Behavior

It has been a very difficult start to 2022 for investors. Worries about rising inflation and interest rates have been exacerbated by the conflict in Ukraine. Stock markets have been very volatile.

Successful investing has always been as much about clear thinking and controlling your emotions as it has about technical factors like PE ratios and balance sheets. So, although there is currently much uncertainty, we believe strongly that it is not a time to panic. In contrast, recent events only emphasise the importance of taking a long-term view.

Playing the long game

Since 1990 there have been some significant falls in stock markets, notably in 2002 and again in 2008. Despite this, and as shown in the graph below, a balanced portfolio consisting of 50% in global stocks (represented by the MSCI World Index in sterling terms) and 50% in global bonds (represented by the Bloomberg Barclays Global Aggregate Hedge GBP Index) has outperformed the Bank of England Base Rate over any rolling 15-year period. Over 10-year periods, it has outperformed 86% of the time.

50% MSCI World and 50% Bloomberg Barclays Global Aggregate Hedge GBP Vs. Bank of England Base Rate, rolling 15 Year returns

Source: Square Mile and FE fundinfo. Data as at 31st January 2022. Past performance is not a guide to future returns.

Wars don’t have a long term impact on markets

As we watch the horrific events unfold in Ukraine, we do not want to downplay for a moment the emotional and economic scarring being inflicted on those who are directly and unintentionally being caught up in the conflict. Hundreds of thousands of civilians are being displaced and a full-blown refugee crisis is underway.

However, looking at how the FTSE 100 Index was affected by both the Gulf War in 1990 and the 9/11 terrorist attacks, it shows how quickly stock markets can recover from such events. In August and September 1990, the FTSE 100 fell 13.5% but it had recouped all of this loss by February 1991. Similarly, the FTSE 100 fell 8.1% in September 2001 but this loss was recovered by March 2002.

If the war remains contained within Ukraine and Russia, then historical precedent suggests stock market losses will be short-lived and investors will quickly look beyond the conflict.

The risk of panic selling

If you panic and sell:

You lock in your losses.
You miss out on the best returns that often follow.

Some of the biggest daily losses have been followed by some of the biggest daily gains. In the final quarter of 2008, for example, the FTSE 100 Index saw four of its worst ten days since 1986. However, over the same period the Index also experienced six of its best ten days. This just goes to show that timing the market is impossible over the short term and it is almost always best to stay invested.

As is illustrated in the chart below, if an investor, who had originally invested £100, had missed out on just the top ten best days for the FTSE 100 since the end of 1985, then their return would have been just half of an investor who had remained fully invested. If an investor had missed the best 72 days, they would actually have lost money.

FTSE 100 Performance from £100 Investment, 31/12/1985 to 31/01/2022

Source: Square Mile and FE fundinfo. Data as at 31^st January 2022. Past performance is not a guide to future returns.

We completely understand the temptation and tendency to panic when share prices are falling. It is human nature. However, all the evidence and past precedent suggests that at times like this the best investment strategy is to urge your clients to remain calm, to stay invested and that this will be to their benefit over the long term.

Important Information

The thoughts expressed in this document, written by Square Mile, relate only to the portfolios they manage for us on behalf of our clients and as such may not be relevant to portfolios managed by other parties.

Retail investors should obtain professional or specialist advice before taking, or refraining from, any action on the basis of this document, remembering past performance is not an indication of future performance. Square Mile Investment Services Limited (“SMIS”) makes no warranties or representations regarding the accuracy or completeness of the information contained herein. This information represents the views and forecasts of SMIS at the date of issue but may be subject to change without reference or notification to you. SMIS does not offer investment advice or make recommendations regarding investments and nothing in this document shall be deemed to constitute financial or investment advice in any way and shall not constitute a regulated activity for the purposes of the Financial Services and Markets Act 2000. This document shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity and is not a recommendation to buy or sell any funds or investments that are mentioned during this document. Should you undertake any investment activity based on information contained herein, you do so entirely at your own risk and SMIS shall have no liability whatsoever for any loss, damage, costs or expenses incurred or suffered by you as a result. SMIS does not accept any responsibility for errors, inaccuracies, omissions, or any inconsistencies herein.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.