When stock markets decline heavily, investors are very tempted to sell off to protect their gains or even worse to stop the losses from accumulating.
Although this might be justified in some scenarios, most of the time staying invested in the market over the longer term usually gives the best returns. Markets do fluctuate over time and thus it might be very tempting to buy and sell investments continually to chase short term gains. While you might make some gains, this strategy rarely helps you to achieve your long term investment goals.
The above chart shows returns generated since Jan 2007 up to Jan 2018.
As we can see, if we kept the investment throughout all the period (light blue line), including the 2008 recession, the investment would have by than increased 138%.
On the other hand, if we would have been controlled by our emotions and sold off when the market declined, and bought back once we had confirmation that the market is back on track (dark blue line), our portfolio would have increased by only 55% (that is 88% less should we have kept the investment).
By selling at a loss, and exiting the market forever (green line), we would have of course eroded our capital as we never allowed the market to recap the losses, and we would have also suffered the erosion from inflation.
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