New research published by behavioural finance experts, Oxford Risk, revealed that during the initial COVID stock market shock and first lockdown, 8% of savers and investors sold off some of their shares or took money out of the stock market.
Of the number who own shares, 34% said they now own fewer than they did at the beginning of the year, versus 12% who now own more.
Around 1.38 million retail investors sold £10,000 or more of their investments during the early stages of the COVID lockdown, while 531,900 people sold over £100,000 of their holdings. Regarding the freed-up funds, 59% left their money in savings, while 31% used it to contribute towards living costs, and 29% put the money towards clearing debts.
Over the summer, equities regained considerable ground, with tech and biotech shares enjoying the tail-ends of their lockdown surges. Despite the opportunities these easy-pickings rallies offered, 29% of investors who cashed in their holdings at the beginning of lockdown have not reinvested any of it back into markets. Similarly, only 10% have reinvested 50% or more.
Of the number who did reinvest, 26% said they did this in one fell swoop, while 52% said they did it in chunks, and 22% gradually ‘drip fed’ their money back in.
Speaking on the research findings, Oxford Risk’s Head of Behavioural Finance, Greg B Davies, PhD, said: “Many of the investment decisions retail investors make are for emotional comfort, and in a normal year this can on average cost them 3% in returns. Driven by the COVID-19 crisis, stock market volatility levels have been greater this year, so the losses will be higher.”
“Those investors who pulled money out of the markets in March will already have lost much more – they lost when the markets dropped, and many have missed out on the rebound since. Many are also likely to find it emotionally difficult to get this money reinvested for the long-term and so may lose out on even more foregone returns in the long-run.”
The recent findings follow the company’s previous report, which found that investors’ decisions to increase their cash allocation during the pandemic, may cost them between 4% and 5% per year in long-term returns. It added that the ‘Behaviour Gap’ – losses due to timing decisions caused by investing more money when times are good for stock markets and less when they are not – costs investors an average of 1.5% to 2% a year over time.
CEO of Oxford Risk, Marcus Quierin, PhD, concluded by saying that: “There are many behaviours common with investors during volatile and uncertain times, and they can be tempted to focus too much on the present and feel compelled to do something even when sitting tight is the best solution. […] Those worried about falling stock markets should remember that they only turn paper losses into real ones when they sell.”
“Retail investors should avoid watching the markets day-to-day as this increase anxiety and remain focused on their long-term plans and ignore much of the background noise that can tempt them into making the wrong investment decisions.”
