Should I stay, or should I go?

Paul Carrington
Paul Carrington
InvestSense Director - Head of Adviser Solutions
Not the time for panic selling.

With most major stock markets down around 30 – 35% at the time of writing, many investors are probably left wondering whether they should stay in the markets or go to cash or something less risky.

Prior to the COVID-19 outbreak, markets were experiencing one of the longest bull markets in history, now many investors are left wondering where to next as we face an unprecedented moment in recent history. 

The emotions we feel when markets are behaving like they are at the moment are completely normal and you can be forgiven for thinking investment markets are not for you or that you will be happy just having your money in the bank. 

The cycle of market emotions graph below has been around for decades and through many market cycles. It simply explains how we are all feeling at different times of the market cycle, both when things are going well and when things are not, as we find ourselves in this period.

As you can see below, when we are feeling the emotion, “Capitulation” (selling and going to cash), this is nearing the bottom of the cycle and in many ways the wrong time to sell, as it is the “point of maximum financial opportunity”. 

I will also point you to the top of the cycle, this is where we have all been over the past few years, a time when we have felt “Euphoria” feeling how good the share market is, and how happy we feel about our investments, yet this was the time when we were at the maximum risk. 

At InvestSense we are very aware of the market cycles and consequently, the portfolios have been well-diversified, also in most cases, we had less of your money exposed to expensive shares than many other investment portfolios in the market. We also have allocations to cash and other non-share investments in the portfolio which we will look to deploy into the portfolio as we get closer to the bottom of the cycle “point of maximum financial opportunity”.

Generally, after share markets have had a large selloff, they tend to rebound quite strongly, this is why selling out of shares and moving into cash near the bottom of the cycle can be the worst action to take, especially when money in the bank is not even keeping up with inflation, in reality, the value of your money is going backwards. 

To help provide some context around how recoveries have played out historically, the chart below outlines some of the larger market falls that US equities experienced over the last 120 years and then how they have recovered. It can take some time to recover and this is where you will need to be patient.

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