Emotional responses to volatility risk destroying client returns, Seven Investment Management has warned.
Ben Kumar, senior investment manager at 7IM, said that during periods of market turbulence, clients are often tempted to sell up and put their money in cash for a period of time, but said that this knee jerk reaction can be detrimental to returns.
Kumar said: “Pulling investments in response to market volatility can result in significant losses over the long term.”
Analysis from 7IM found that if a client had invested in the FTSE 100 20 years ago and missed the best 30 days due to an emotionally-charged decision to sell during periods of volatility, they would have lost money, with the annualised return coming in at -2.3%.
In real terms, a £100,000 investment in the FTSE 100 in 2001 would now be worth just £62,895 if a client missed the 30 best days, a loss of almost £40,000.
In contrast, if a client had chosen to stay fully invested, their investment would be worth £295,372 now, almost three times more than the original figure.
Missing just five of the best days would see this amount slip to £193,530, while missing 10 of the best days would have resulted in a total return of £147,299.
Kumar said: “When markets are choppy, people get twitchy. They start thinking that it’s better to be safe to move to cash and therefore avoid potential pain. But those instincts tend to be wrong. Staying invested is the sensible move and not doing so can destroy returns.”
According to 7IM, 14 of the 20 best days for the FTSE 100 were within two weeks of one of the worth 20 days. Sharp falls in stock markets tend to be concentrated in short periods of time and similarly, the biggest gains are often clustered today.
Kumar added: “It is not uncommon for a large surge to follow a big fall, or vice versa, suggesting that investors who attempt to anticipate when the best time to invest in run a high risk of missing the largest gains.”
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