Spooked by ongoing sharp decline in value of investments - should I cut my losses?

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/81930044#Comment_81930044

Luckily there is long term data available to check - and there is indeed a correlation between lower valuation and higher future returns.

Cus

https://forums.moneysavingexpert.com/discussion/comment/81930039#Comment_81930039

Phew, I thought I was going mad lol. So based on that thinking, does it make sense that it is a good opportunity to invest when prices have dropped (as is the general thinking, as per earlier in the thread) or does it actually make no difference? Is there any historical data to suggest that it's more likely for an asset to rise more percentage wise after a drop than if it had never dropped at all?

seacaitch

For people who struggle with volatility, but who realise that being in cash long term is not a great solution, then a medium risk multi asset fund can be the perfect solution.

Bearing in mind the OP wrote of "ongoing sharp decline in value of investments" after "the value of the investment has dropped by over 3%" - 3%! - a multi-asset fund won't be any help here, since they'll also experience (much) greater declines than this.

If spooked by just ~3% declines, which aren't even in "pullback" terminology territory, then there's probably more going on here than their fund choice just needing tweaking to their risk/volatility tolerance by choosing a somewhat less volatile multi-asset fund. The OP seems to be signalling that they're currently very susceptible to deviating from an investment plan by negative newsflow. They need to think about and address that huge issue, else they risk selling out of any investment that experiences "normal volatility", never mind experiencing a bear market.

I suspect that a large part of the answer here is for the OP to significantly improve their investment knowledge and learn about what's normal and to be expected when holding investments over the longer term; especially why drawdowns in accumulation needn't spook them, and can be to their advantage. Whatever investment vehicles they use, this is relevant, as everything that's non-cashlike will experience drawdowns, sometimes very significant ones.

Cus

https://forums.moneysavingexpert.com/discussion/comment/81930047#Comment_81930047

Apart from the argument of value versus index investing etc, I suspect that if an asset price drops a large amount, does that mean it's now undervalued, or is the market correct and values it correctly now and it was overvalued?

Cus

https://forums.moneysavingexpert.com/discussion/comment/81930055#Comment_81930055

Can we keep this thread off topic please 😉

Xenon

There is always something happening that spooks the market - part of the game of investing.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81930049#Comment_81930049

I personally think there comes a magnitude of fall in the general market where the medium term upside case becomes very convincing. Falls of the magnitude we have seen so far, to my mind, don't move the needle. What's needed is a pronounced change in sentiment. My assessment is that equities are falling, but the market is still full of optimism. I am not even considering re-risking at this juncture, if that's what you are asking. A significant fall of 30+% would convince me to at least rebalance and probably over-rebalance into equities. But I am not seeking out an opportunity to take any action.

chiang_mai

Investing is a process, not an event, that said, I have some sympathy for the op who has never been through this process previously.

All things being equal, the current squall will blow over and after a while the op will begin to realise a profit. In time, another squall will come along, but since you'll likely be sat on a 10% gain, another 3% loss will not mean much and you'll shrug it off. And so the cycle continues. If you're unlucky then q significant storm will come along and you'll see much larger losses. If by that time you've built up a profit buffer, things wont seem that bad. If you haven't, it just means you'll have to wait longer until you get out of the red.

For more seasoned investors, now is a good time to check your loss assumptions and see how well/poorly your funds are behaving. Are you seeing the sorts of downside and drawdown you expected, have there been any surprises? I hold over a dozen funds, my biggest faller was 7% by a Japanese fund, which is in line with 10.5% volatility but belies the MS 68 risk rating. Still, it's only a 3% holding so not a big deal, plus it had already earned 36%, earlier in the year. I'm still holding at -3% overall but the future of bonds is a concern. I was very firmly in the short term camp but I did dip a toe into some intermediate Treasuries, which now, with all the discussions about possible rate increases, may not have been my best move of the year! Still, my year end is nearly here and my 15% looks safe(ish).

LHW99

https://forums.moneysavingexpert.com/discussion/comment/81930058#Comment_81930058

IMO that's requires a polished crystal ball, a suitable piece of string and at least one finger in the wind. I tend to look at it that if everything is going down, and possibly papers are proclaiming armageddon then I will consider whether adding more equity investments that I have already been keeping an eye on is a good idea. I wouldn't on the whole sell anything, as however bad the loss looks today, it's only on paper - it's not real until I actually cash in.

On the other hand if a fund I have has been going down relative to those in the same sector and has continued to for a year or three, then I might well sell out and move to another investment.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/81930049#Comment_81930049

If it exists (and there is some evidence that it does), mean-reversion (which says returns eventually conform to their long-term average) suggests that future returns will (eventually) be higher after a fall in prices. Problems with this (for me at least) are that the long-term average can only be measured using historical data - there is no underlying 'physics' that can determine how close the historical measurement is to the actual value (and it is possible that the long-term average varies with time) and 'eventually' can be a long time (i.e., decades).

Related to the above, there is also some evidence that valuations matter. For example, real returns over the next 10 years are partially correlated (IIRC, a correlation of about 50%) to 1/CAPE (CAPE is an inflation adjusted price to earnings ratio). For example, see https://www.kitces.com/blog/us-equity-valuations-investment-cape-10-diversification-stocks-sp-500/ and references for a discussion of CAPE.