Investors thinking about selling out now risk crystalising losses and making a “knee-jerk” reaction that could potentially lose them hundreds of thousands of pounds in future returns, according to new data from Alliance Trust.
With the pound plummeting, inflation at four-decade highs and interest rates on the up, it would be understandable to want to sell out and wait for more prosperous days ahead.
Although the world appears as fraught and volatile as it has been since the global financial crisis, research shows that investors end up paying an ‘impatience tax’ if they sell out too early.
Indeed, investors could lose out massively if they did so, as shown in the graph below. It compares two hypothetical investors who both invested £10,000 in 1992 and added 10% of the average national salary a month for the next 30 years and has used the Alliance Trust share price as a proxy for the market.
The patient investor held on through any market dips, while the impatient investor sold 25% of their shares when the market dipped 5% or more in a single day. When the market recovered 10% in a single day, the impatient investor bought back in.
Over the three decades, the impatient investor would have accumulated £217,884, while the patient investor would be up to £410,757, a difference of £192,872.
Source: Alliance Trust
These assumptions were based on a UK investor survey of 2,000 people, which showed that almost half admitted to crystalising losses before and 12% said they had done so in the past year.
Mark Atkinson, head of investor relations at Alliance Trust, said: “Investing is rarely turbulence free. Those who have been investing since the 80s have seen dramatic market dips thanks to 1987’s Black Monday, the dotcom bubble in the early 2000s, the global financial crisis in 2008 and, most recently, a global pandemic. You would not be blamed for feeling nervous if you were invested in the stock markets during that period.”
He argued that now investors may be more susceptible to selling than in recent history thanks to the cost-of-living crisis, which in the UK has led to rising energy bills as well as higher mortgage payments.
“As the cost of living spirals, it is understandable that people want to avoid taking risks with their money. But for those in the market, selling at a loss to move into cash is not risk-free,” he said.
“With inflation nearing double digits, the real value of cash savings is falling by 7 or 8% and even despite market dips, long-term investments in equities have proved to outperform cash over any 20-year period.”