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Avoid these five investment blunders during a crisis

Was “let’s sell for now and wait for the dust to settle”, one of your mantras during the recent market shock? There are some common mistakes made during a crisis. Sometimes they come down to individual decisions. Often, they are as simple as financial advice gone wrong. Here are my top five common blunders that investors may encounter during a crisis.

Mistake 1: “Let’s sell for now and wait for the dust to settle.”   

The equivalent for cash-rich investors would be “Let’s keep the cash and wait for the dust to settle”. The key S&P500 benchmark on Wall Street, widely considered an indicator of global market sentiment, has rebounded by more than 60 per cent since its low on March 23, 2020 and most investors that have not bought are still in waiting mode.

An alternative view

 Instead of waiting, it is much better to build a solid exposure structured around well-defined investment themes, such as the US market and China. Potential winning infrastructure sectors might include IT & Communications, Healthcare, and Industrials. Other attractive opportunities may also be found within the Consumer Discretionary and Consumer Staples spaces.

(Consumer Discretionary stocks represent companies producing non-essential goods and services. Consumers tend to reduce discretionary spending in tough economic times such as those we currently face. Consumer Staples refer to basic household products that people are unlikely to reduce their demand for when times are tough because people see them as basic needs.)

Mistake 2: “The market is wrong.”   

No, it is not. It is us, as individuals, who are wrong. At any point in time, the market simply discounts all public information available (the fundamentals) as well as investors’ psychology (momentum).

An alternative view

Never fight a trend. Most of the time, we understand several weeks/months later why the today’s market trades at current levels. It is better to listen to what the market has to say to us and only when a trend changes should we adjust accordingly. The current secular bull market started in May 2013. On average, this period lasts 16-18 years.

Mistake 3: “This time is different.” 

No, it is never different. We may feel this way because we are living an unprecedented experience due to the pandemic, it is the context that is always different. In 2000, it was all about sky-rocketing valuations. In 2008, the financial system (not the market system) was falling apart.

An alternative view

What never changes is our behaviour or our reaction, which is always based on greed and fear. Today it is fear that guides our feelings and this bodes well for the continuation of the bull market (a market that’s rising). Always remember: Bull markets end with euphoria, not fear.

Mistake 4: “I cannot sell this stock at such a loss. Let’s keep it for a while and see what happens.”  

Avoiding a loss (and keeping zombie stocks) is one of the worst strategies ever, in my opinion. Normally, “what happens next” is absolutely nothing as these stocks go nowhere. An unrealised loss is still a loss. The best way to quickly recover from previous losses is to make sure that what we own now will outperform in the future.

An alternative view

COVID-19 is changing the world. It clearly defines winners and losers, so be quick at selling the losers. Don’t keep the cash but reinvest into winners that benefitted from the acceleration triggered by COVID-19.

Mistake 5: “Buy low, sell high.” 

On paper this looks great. In reality, you know when a stock was low and when it was high (for example, when to buy and when to sell) only after the fact. Particularly in a positive market environment, you tend to have a contrarian approach and only buy stocks that trade at a low level. Unfortunately, they often trade low for a good reason, so you buy what you should avoid (see mistake 4). Alternatively, what’s much worse is that you may wait for the perfect moment to buy low and then you never buy.

An alternative view

A much more effective strategy is to “buy high, sell higher”. If this is the right stock within the right investment theme, it is not that important if you buy it at a “high” level.

A market shock is challenging. Don’t make it worse by following these five common misconceptions.

Diego Wuergler, Chartered Financial Analyst (CFA),  Head of Investment Advisory, Bank Julius Baer


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