Bear Market Mistakes Are Being Repeated

With Wednesday’s 4% decline, the S&P 500 is down 17.5% year-to-date and 18.36% from its 52-week high, meaning the door of the bear market is being knocked on.

Unfortunately, rough market environments have ways of inducing the worst in investors. As in there’s a lot of selling low going on these days. Obviously, buying low and selling high is always easier said than done, but selling amid vicious declines is a preventable offense.

First, some caveats. Investors that are sitting on gains accumulated last year are right to consider trimming those positions with equities tumbling on a seemingly daily basis, but that doesn’t mean abandon the market outright. Second,  jittery market participants need to remember that assets don’t move up in straight-line fashion. That is to say there will be bumps along the way.

Finally, investors that sell at or around market troughs ultimately regret that decision. Some new data points indicate recent sellers, despite stocks careening lower, already regret equity sales.

Important Survey Tidbits

A recent MagnifyMoney – a unit of LendingTree – survey indicates investors have been particularly sensitive to headline events over the past year. Whether it’s the coronavirus pandemic, geopolitical tensions, goings on at the Supreme Court or interest rate tightening, some investors have been quick to push the “sell” button.

The survey says 38% of investors have pulled money from stocks over the past year and a comparable percentage – 40% to be precise – regret doing so.

“Those numbers are a classic example of what this survey is about. It’s perfectly rational to react to these types of declines by wanting to get out of the market and cut your losses,” according to MagnifyMoney. “However, for most of us — those in it for the long haul, aiming to build wealth through the stock market in hopes of perhaps retiring or owning a home someday — it’s best to hang in there. As hard as it may be, it’s likely the best move for your financial future.”

Making matters worse are the demographic trends in the aforementioned selling data. Of the aforementioned 38% that yanked money from the market in recent months “Gen Zers (67%), millennials (57%) and men (49%) were most likely to take out money.”

Forget the gender part of those statistics. What’s alarming is that younger investors with the benefit of the most precious commodity – time – are leaving the market at exactly the wrong time.

“This is troubling, as time is an enormously powerful asset in investing. Gen Z and millennial investors have decades ahead of them to let compound interest work its magic and ride out the market’s ups and downs. While markets are inherently volatile, they tend to rise over the long term. However, by panicking and pulling money out of the market during a downturn when they’re young, these investors risk missing future upswings in the market, potentially costing themselves thousands of dollars in lost funds over the years,” adds MagnifyMoney.

Investors Need to Drown Out the Noise

In investing, ignorance isn’t bliss, but paralysis by analysis is a real condition. That is to say, investors can consume too much news and, as a result, make regrettable decisions. The survey says that scenario is playing out today.

“Seven in 10 Americans say world news and current events have factored into their financial decisions or money management choices. Those with annual household incomes of $50,000 to $74,999 (80%), Democrats (77%), investors (77%) and millennials (76%) are most likely to say so,” concludes MagnifyMoney.

Interestingly, the survey indicates investors’ priorities need some adjusting when it comes to the news they use to implement investment decisions. Just 3% say they focus on earnings reports, but nearly four times as many say climate change directs their decisions to sell stocks. Additionally, more than two years past the arrival of the coronavirus pandemic, 51% of those polled by MagnifyMoney say COVID-19 headlines direct their sell decisions. That’s more than quadruple the percentage that say Federal Reserve policy informs their decisions to sell or leave the market. Indeed, these behaviors need to change.

Related: This Is Not a Market to Fear. It’s Winning Time!