Why does everyone sell their stocks when the market crashes?

In this blog I will list some of my top Quora answers for the last few days, which focused on many interesting subjects.

In the answers shared today I focused on:

  1. What are the multiple reasons that people sell their stocks when the market crashes?
  2. Which investment strategies work out for most people long-term and which don’t?
  3. Why do many night-clubs and entertainment businesses go bust? Perhaps there could be an interesting reason few consider when answering such a question.
  4. Can high-income people fall into poverty, and what does the coronavirus tell us about that?
  5. Is saving money pointless, or is it just not as effective as investing the cash instead? Also, what mentality prevents people from savings or investing in the first place?

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me or use the WhatsApp function below.

Why does everyone sell their stocks when the market crashes? Doesn’t it go way back up in most cases? Or are they just shorting it to buy at a lower price?

Source: Quora

Firstly, it isn’t the case that “everyone” sells stocks when markets crash. You are right though in saying that many people do.

These statistics are sterling:

  1. Vanguard, the second largest asset manager, saw record outflows in recent times during 2009, and record inflows during 1999. This is despite the fact that they put out loads of information online telling people not to time the markets
  2. From February until May, Fidelity announced that 35% of their over-65 clients completely sold out all their positions. I am sure that over 50% partially sold or stopped buying.

The reasons are varied about why this happens, and it depends on the person and their circumstances.

The main reasons are

  1. Human nature. Fear is the strongest emotion. Even stronger than greed, egoism, the need to love etc, as the survival instinct kicks in. When people are scared, they do incredible things. This isn’t just about investing either. Look at how people panic bought during the worst of the crisis:

2. Some people mistakenly think they can sell, buy even lower, and make a profit.

3. The media doesn’t help. Every single time they cry “this time is different”. Often “serious looking people in suits” come onto TV and say that this time markets won’t recover for X and Y reason. Of course, they are always proved wrong.

4. Many people don’t know basic facts like how quickly markets usually recover from a fall, and that even if it takes 10 years+ to recover, anybody young enough to be a long way away from retirement should celebrate this fact, but it allows for buying stock units at cheaper prices. People who don’t have an advisor are particular likely to either panic or not know these basic facts.

5. Finally, there are those people that know the facts, and that market timing isn’t productive. Yet they have an emergency due to losing their job or some other reason. Some of these people didn’t have an emergency fund before they started investing.

The reasons vary from person to person. Some people learn from the mistake and others don’t.

This can be witnessed in 2020. Some same people who panicked during 2008, panicked in 2020.

Some people that panicked about markets after Trump’s elections waited to invest until after the 2020 election…….stocks then went up by 10% in about a week and had their best November since 1987.

At least half of these gains were before the vaccines were announced, and despite a European lockdown and uncertain US Election result.

What is your best investment strategy that worked?

Source: Quora

There are only a few investment strategies that have been shown to work for the vast majority of people.

  1. Buying and holding the indexes long-term

This works if you:

  • Hold three indexes (your home country, an international one and a bond market one) or just two (a worldwide stock index and worldwide bond index)
  • You reinvest the dividends
  • You rebalance every year
  • Buy and hold for decades
  • Don’t try to second guess the market and keep the faith during those lean times that come for markets
  • Avoid individual positions or keep them down to 10% of your portfolio

2. Hold professional assets in conjunction with the first option

  • Asset classes like private equity aren’t suitable for most do it yourself investors
  • They have been shown to beat public-listed stocks long-term, but they are far riskier and complex, which means most people require an advisor for this.

Stock pickers tend to struggle long-term, and performance isn’t maintained for decades.

Investing in your own business can, of course, produce superior returns to almost any other type of investment.

Yet it is not a like for like comparison because

  1. For most people, and in the majority of situations, it is much riskier
  2. It takes more time and is less passive than investing in say ETFs
  3. It usually requires your health more than a passive investment
  4. ETFs and many other kinds of investments are liquid if you have an emergency
  5. With stock markets, you can get the same percentage returns regardless of whether you invest $1,000 or $1billion. In comparison, in business, earning 40% a year when you have a small business can be easier than 10% for a big business. That is one reason why even some of the wealthiest people in the world, like Bill Gates, diversified away from their core business once it reached a certain level.
  6. It can be more dependent on one economy, product or service. This gets us back to risk. We have seen this during coronavirus. Some businesses in affected sectors have gone to $0 even if they made millions before.

This means that even somebody who is successfully scaling a business should diversify into other investments, rather than being reactive when something goes wrong.

Why is it so hard for nightclubs and bars to stay in business?

Source: Quora

There are 1001 reasons why nightclubs, bars, cafes and others in the hospitality industry can struggle.

Many of these have been mentioned below. I think there is another reason though.

In business, investing and life, most people are looking for the sexy or glamorous option.

For example, starting up a casino or bar in Las Vegas:

Few are interested in doing something like this:

Or this:

Sometimes unsexy businesses can be very profitable and the owners aren’t deluded that it is all about “doing what you love”.

They are more focused on sorting out a problem that needs solving, and there is less competition in these areas.

Is high income truly wealth?

Source: Quora

I was watching a pretty heartbreaking news report yesterday in the UK.

It looked at how many previously middle, upper-middle and even high-income people have suffered due to covid:

The commonalities are:

  • They worked in industries that have suffered due to covid.
  • They either had no savings or they had a bit – enough to last a few months.
  • They had big fixed costs – it is certainly implied anyway.
  • They are reliant on one income, or mainly on one source of income.
  • It seems that few considered the possibility of such a “black swan” event happening. One of the pilots feature, for example, probably wasn’t working when 9/11 resulted in many airlines reducing staff numbers.
  • Most people probably thought of them as being very well-off last year, or even rich in some cases. They probably “looked” rich in the eyes of many people.
  • Most didn’t expect to be in this situation

If somebody is high-income, that can, in reality, mean you are only one, two or three pay cheques away from poverty, if you don’t have an income which pays the bills.

Being wealthy is different. Somebody who has an investment portfolio worth $2m, and is getting a $80,000 income from that, isn’t super high-income even though they are doing better than most people.

Yet they are wealthy and aren’t reliant on their pay cheque alone to pay the bills.

Another key difference is this. Income doesn’t tend to go up forever.

It peaks at around 50–55 for most people, and 30 for some people like celebrities and professional athletes.

Whilst it isn’t true to say that wealth always rises, because divorce and unexpected events can reduce it, the general trend tends to be upwards if people don’t experience those kinds of events.

We can’t prepare for every eventuality in life, but fixing the roof when the sun is shining makes sense, because the good times don’t usually last forever.

Why is saving money pointless?

Source: Quora

It isn’t pointless. Saving money allows you to have an emergency fund if something goes wrong.

That can be key during moments such as Covid, when lockdowns could have affected your industry.

What is true, however, is that saving money has never beaten investing in assets long-term.

Even bonds have beaten cash:

Cash isn’t necessarily less risky either because you face the following issues:

  1. Inflation risk. This can be very extreme in the cases of places like Zimbabwe and some other places, or less extreme. Even with the less extreme options, it all compounds. Take the period after 2008. Interest rates have been close to 0% all over Europe, Japan and some other places. Most savers have gotten 0.1%1% maximum. Inflation has been running at 2%-3% per year. Losing 2% per year to inflation for 12 years is an indirect loss of 30%. This is why inflation is called “the silent killer” of savings. People would panic, often wrongly, if they saw a stock market fall 30%, but they don’t notice that gradual erosion of value.
  2. Currency risks. This isn’t a risk if you plan to stay in the county you are living in forever
  3. Countless other risks such as political, institutional etc. These are greater during periods of war, and in developing countries, but they exist in every country to an extent.

Cash is merely less volatile than assets. Volatility isn’t risk though, if you will hold assets long-term.

Some of the most volatile assets have had the best records of not only producing returns, but also not reducing in value

For example, the S&P500 and various other indexes have produced on average 11% since 1950 – S&P 500 Return Calculator, with Dividend Reinvestment, if you reinvest dividends.

Of course, some years and decades are better than others, but nobody who has held on for 30 years has ever lost money.

In comparison, countless people have lost with cash sitting in the bank.

So, saving isn’t useless at all. Keeping 100% of assets in cash is.

The only people who think saving is literally pointless are the kinds of people who have convinced themselves that it is better to live everyday as it comes.

In practice, this means that they are (usually) also sceptical about buying stocks, real estate, bonds and other assets.

Often this is because of loss aversion – in other words they are paranoid about having loads of money held in assets when they die and therefore not getting to enough the money.

They tend to change their mind when they have kids that they want to leave money to, or something like covid hits and the importance of economic security becomes clear.

Further Reading

In the article below I discuss:

  1. Most people assume that wealth and income are always linked. I was asked today about how much do you need to make to become a millionaire in 20 years. Yet is making money the only part of the “wealth equation”?
  2. There is an old-fashioned Chinese expression that wealth doesn’t last for three generations or more. It is a generalisation, and sometimes wealth does last beyond that point as some royal families in Europe show, but it is certainly the case that wealth seldom lasts three generations or longer. What is the main reason for this, and therefore what is the biggest reason people go from being wealthy to middle-class or lower?
  3. Is getting rich easy? Has it really gotten more difficult compared to decades ago like many people assume?
  4. For expats living in India, what is the best option investing-wise? Many people assume that local opportunities are ideal if you live in one of the world’s fastest growing economies, but is it true? Also, do we need to make a distinction between what Americans living in India should invest in and everybody else?

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