During a stock market crash, it can be tempting to sell your shares and hide in cash until the storm passes. That may feel like a sound move today, but in the longer run, it could cost you dear.
Personally, I’m leaving all my investments to face the full force of the stock market crash, inside my Stocks and Shares ISA, because I’m convinced that lasting the course will make me wealthier in the longer run.
With the FTSE 100 falling by almost a third, it hurts to be an investor right now. More than one in five have responded by either selling their investments, or saying they plan to do so, according to new research from Opinium. I think many will regret their decision.
Sell your shares and regret it
Selling up after a crash is daft, unless you desperately need the money in an emergency (in which case it shouldn’t have been in the stock market in the first place). If you sell your shares, you will crystallise what up to that point is only a paper loss.
By making a dash for cash you are locking yourself out of the recovery, when it finally comes, as history shows it always does. In fact, the FTSE 100 is already up by around 12% since dipping below 5,000 last week, so anybody who sold in a panic then already has cause to kick themselves.
Warren Buffett says hold tight
You may then face a difficult decision of when to buy back into the market, one that you are almost certainly going to get wrong, because timing the market in this way is impossible, even for the best investors. Investment greats like Warren Buffett know this, and have made their fortunes by curbing the instinct to race in and out of cash.
Serious investors prefer to buy and hold for the longer term, instead. “Our favourite holding period is forever,” Buffett said, and that’s what you should be aiming for, rather than dashing into cash during a stock market crash.
Here are two more reasons why bailing out of the stock market crash is likely to backfire. First, you will rack up trading charges, which eat into your wealth. Second, you will miss out on all the dividend income you would have received if you had stayed invested.
Survive the stock market crash
Finally, you then have to put up with the dismal returns you get on cash, which look set to fall even lower after the Bank of England cut base rates to 0.1%.
The Opinium research shows that 43% are sticking with their current investments in the hope of riding out the uncertainty in the long term. That’s encouraging, but still leaves too many who are choosing to sell their shares instead.
Resist the temptation to join them.