Why the worst time to sell is usually right now

In the past week and a half, Iran’s Supreme Leader has been assassinated, oil surged from around US$72/bbl to as high as US$119.50/bbl, the Strait of Hormuz closed, and local markets corrected by roughly 8%.

As often happens when markets face external shocks like this, panic levels have risen fast. US volatility almost doubled, local volatility rose 58%, and anecdotally, there’s been a spike in calls to financial advisers from clients asking if they should switch to cash.

Zooming out

But markets are prone to short-termism. It took just one week of volatility for many investors to forget that the S&P/ASX 200 has returned 7% p.a. over the last 20 years, 9.3% p.a. over the last 10 years, and 14.3% over the last 12 months[1] – and that’s after the falls of the last week have been accounted for.

During that 20-year period, we’ve seen the Global Financial Crisis, the European Debt Crisis, the largest global pandemic since the Spanish Flu, as well as corrections in 2015, 2018, and 2022, which never caused a significant enough impact to have a lasting name. And who can forget last year’s tariff turmoil? It lasted all of two weeks and recovered by the end of the month.

My intention is not to trivialise these events. The GFC, in particular, had a very real financial impact on many people, especially those retiring around that time. And according to the WHO, more than 7 million people have died globally from Covid[2]. Even the more regular, ‘minor’ sell-offs can have a very real psychological impact and lead people to make poor decisions that impact their finances long term.

That’s really the point. More often than not, the biggest negative impact these selloffs have is reducing long-term performance for investors, and it’s entirely behavioural.

In fact, I’ve written some variation of this article at least half a dozen times over the past decade. While the details may change, the message is always the same – don’t be your own worst enemy. I say this from experience too. Some of the worst investing decisions I’ve ever made have been selling shares in the middle of a drawdown, only to see them rebound a few days later.

And those rebounds can be significant. If you look at all the single day rallies that exceeded +4% on the S&P/ASX 200 over the last 20 years, all but one occurred either during the GFC, or the Covid Crash. That one exception was 10 April last year – right in the midst of the escalating trade war between the US and China, and just a week after ‘Freedom Day’. If you look through a full list of the largest rallies, you have to go a long way down to find an example of one that didn’t occur during a major market sell-off. Which is why you often see research and writing along the lines of “what happens to your returns if you miss the 20 best days over 10 years”. It’s not just marketing spin; investors have a habit of selling during drawdowns and then missing the subsequent rallies.

Even today, as I’ve been writing this piece, we’ve seen a microcosm of this effect in the Materials sector. Materials has been one of the hardest hit sectors over the last week, falling 16% from its peak on 3 March to its nadir earlier this week. While it eased off a little in the afternoon, the S&P/ASX 200 Materials Sector (ASX: XMJ) was up 2.7% at one stage on the 10^th.

What to do instead

The lesson from all of this is simple, volatility doesn't hurt returns – behaviour does.

One of the first times I wrote on this topic (sadly, due to a website upgrade, the original is lost, but it was republished a couple of years later here), back in 2016, I spoke to a handful of Livewire contributors and asked them how they handle it when their “holdings get crushed”. Some were trend-followers, some were value investors, some were growth investors, so naturally, they all had different approaches. But their responses had one thing in common – they had a plan before the selloff. They didn’t have to decide what to do, because it was already defined in their process.

Whether you invest in managed funds, ETFs, direct shares, or some combination of these, having a predefined process is something that can benefit every investor. It won’t change the events or your decisions of the last week, but it can help to prevent you from doing something you later regret next time there’s a selloff.

So don’t wait for the next one, remember this article, and then think to yourself, “Oh, I really should’ve written down a process”. Write it down now and be prepared. And I do mean write it down – save it somewhere important, or stick it to your desk. Don’t lose it, and don’t assume you’ll remember it. Because when emotions run high, it’s easy to forget your principles and make mistakes.