‘Don’t constantly monitor your investments’. That’s the mantra that advisers have been trying to drill into clients’ heads since time immemorial.
24/7 access to information is one of the greatest developments of modern times – but it is also one of the worst.
Any moment of any day can see someone log into an app or website to see how market changes have affected their investments.
‘The value of your investment can go down as well as up’.
Yes, we all understand that from an academic perspective, but it doesn’t mean that investors actually want to experience losses or see red numbers flickering across their screens.
What if those stocks never recover? What if they go down even further? Maybe I should sell and cut my losses now?
The next thing you know, buttons are being pushed, instructions are being given and those positions are being liquidated… only for them to recover any losses over the next day or two.
Questionable expertise
Research from US university MIT has found the demographics most likely to fall into that trap and lock in financial losses.
An August 2021 academic paper, entitled ‘When do investors freak out? Machine learning predictions of panic selling’, discovered that the investors who tend to freak out with greater frequency fall into one or several of the categories below:
- Male
- Over the age of 45
- Married
- Have more dependents
- Self-identify as having excellent investment experience or knowledge.
The researchers – Daniel Elkind, Kathryn Kaminski, Andrew Lo, Kien Wei Siah and Chi Heem Wong – used anonymised US brokerage account information from 2003 to 2015 to examine panic selling and ‘freakout’ behaviour.
In addition to the demographic data above, they identified the following characteristics or outcomes.
Firstly, while panic sales are infrequent, with only 0.1% of the investors doing so at any point in time, they occur up to three times the baseline frequency when there are large market movements.
Second, 30.9% of panic sellers never return to reinvest in risky assets. However, of those that do, nearly 59% re-enter the market within six months.
Third, the median investor earns a zero to negative return after the panic selling.
The evidence is there, panic selling leads to losses.
But cool, calculated reason is up against something that cannot be quantified – human irrationality. And when the two collide, the latter usually comes out top – even if logic dictates it should be the other way around.
