The Biggest Investment Mistake

David L. Johanson |

Sometimes the science and art of investing can go astray with an error in judgment.  Panic selling is by far, one of the biggest impediments to a person not meeting their goals.  Decades of study have gone into behavioral finance and how we react to certain factors.  Findings state our emotions can be our worst enemy.  

In a new research study of 2020 investor behavior, Vanguard found nearly 14,000 self-directed participants in defined contribution plans and about 18,000 self-directed retail investors went fully to and stayed in cash between February 19th to May 31st.

When Vanguard compared actual returns earned by the panicked individuals to what they would have earned by sticking with their holdings, it is clear the advice to “stay the course” was wiser.

The problem in trying to time the market, and trying to sell when worries mount, is that to benefit from the sale, one must get back in at a lower price point than when they sold.  Panic sellers did not do that.  As the market recovered, more and more of these people saw price points above their exit level so fewer benefitted from getting out.

The combination health crisis and election worries are going to make us all anxious.  It is very hard to sit back and stay the course.  Should we reduce equity exposure?  Buy Gold?  Cash?  Having an asset allocation tailor-made by Johanson Financial Advisors to your own specific goals, risk tolerance, and time horizon should give us all peace of mind.

Regardless of stress levels, history has shown those who have a sound plan and heed the advice to “stay the course” have endured past bear markets of varying length and ferocity.  Our clients who made the same decision during this quick bit of turmoil in 2020 have also fared well.

Although we do not know when this pandemic will subside, we will have plenty other reasons to fret and worry in the years to come.  We prefer the odds of prudent long-term investing versus the odds of trading around current events.  Stay the course and reap the long-term rewards.