Compelling reasons not to sell down during a bear market

Should I stay or should I go: These immortal lines from the Clash’s timeless classic could so easily apply to share investors struggling to hold their nerve amid heightened share market volatility.

Like deer in the headlights, a lot of share market investors, especially those unaccustomed to major falls or crashes, don't know whether to sell - and lock in either losses or lower profits before markets fall further - or hang in there until markets finally correct.

Nervous nellies

When it comes to loss aversion, it’s males, above the age of 45, and married with dependents - who pride themselves on excellent investment knowledge – who are more likely to panic sell than cool their jets when the going gets tough.

Some investors may feel that doing something (a la selling) when markets flail wildly is better than sitting on their hands. However, history proves convincingly that selling in fear of not getting out (FONGO) fast enough is typically the worst reaction you could have to a falling market.

As well as locking in a loss, by exiting the market, you also risk being on the sidelines at the very moment markets spike. You’ll also risk [by default] relegating your investments to inferior performing asset classes.

Source: Vanguard

Long-term trend is your friend

Admittedly, on any given day, week or month, the share market can be a cruel paramour. But over the longer term, the trend is your friend, and here’s why.

Firstly, despite the global pandemic, and global financial crisis, Australian shares have over 30-years – an investor’s typical time horizon – outperformed all other asset classes (see table above).

Secondly, whenever shares markets have fallen, they have always gone on to exceed previous highs, and in a post-pandemic world the time it’s taking them to do so is getting faster.

The S&P/ASX 200 fell 32% from 7139 points 14 February 2020 to 4816 20 March 2020 but had bounced 6.8% higher to 7628 by 13 August 2021.

Fast foward to this year, and recover is even more acute

On 4 January 2022, the share S&P/ASX200 tumbled from 7,589 to 6,838 a little under two weeks later. But by 21 April 2022 the index was back up above the previous year to date high at 7,592.

Believe it or not, despite all the recent volatility, the ASX S&P/ASX 200 is still only down -3.89% year to date which doesn’t even constitute a correction, which technically is a fall of 10%.

Now for the detail

If you’re impatiently waiting for the share market to recover, take heart. There’s no shortage of data to prove convincingly that over the long-term share markets return in spades.

• According to Credit Suisse data, Australian shares have delivered an average annual return of 6.7% since 1900, making it the world’s second-best performing share market over 120 years.

• Further afield, between 1928 and 2019, the US economy, as measured by the S&P 500, has had 25 bear markets and 26 bull markets, and for each of those bear markets, the share market has recovered every time.

• According to Analysing Alpha data, even when it comes to bear markets, a bull market has always more than made up for the gains that were lost.

Still considering selling? Note this, on average, in the US, share prices have dropped by 36% during a bear market, but gained 112% during a bull market.

Ask yourself this

End of financial year is an opportune time to cull deadwood stocks within your portfolio.

But if the quality stocks you own are as appealing today as they were when you bought them, ask yourself if it really makes sense to exit now?

Admittedly, trying to time the market is a mug’s game, but the prospect of buying more quality stocks - while they’re trading below their intrinsic value - can make a lot of sense once markets finally rise.

Australian share market graph

Source: Vanguard