During times of uncertainty, volatility and market malaise, many ASX investors feel the need to sell out of some, or even all, of their ASX share. How do we know this? Because if a share market is falling, it usually means there are more sellers than buyers in the market. That's how the laws of supply and demand play out on a stock exchange.
But this might not always be the best move for an investor. After all, the legendary billionaire stock picker Warren Buffett is famous for his oft-repeated mantra of 'be greedy when others are fearful'. And history is full of examples that show that selling when the market tanks is usually not the soundest of moves. For example, it didn't take too long for an investor that cashed out the shares back in March of 2020 to feel very silly indeed.
But of course, that wisdom is only available in hindsight. And it is certainly easier said than done. Over 2022 so far, we have seen a lot of share market volatility. From fears over inflation and rising interest rates to the ongoing war in Ukraine, there has been a lot of negative news. And judging by the gyrations we have seen in the markets, there has been a lot of selling too.
Fear and greed
So have you considered selling (or have sold) your ASX shares at the wrong time out of fear?
Geroge Wong of Kauri Asset Management, says that despite the dread that volatility causes, there are good reasons why you should avoid acting impulsively. Writing for Livewire, here's some of what Mr Wong had to say:
Humans have a tendency to be scared during times of uncertainty, especially when it comes to things that we cannot control. A falling market is just one example. This is a phenomenon that is in many respects conditioned into us as part of the fight or flight response… It was evident thousands of years ago in our ancestors, and it is still on show today…
In the minds of many, it is better to make a decision to try to do something to reduce our fear. However, that often might not be the best course of action given the emotions tied to those decisions and the general tendency for the market to climb higher over time.
We never 'have to' do anything, including selling shares
Wong calls this "decision" an example of 'action bias' – the need to do something. If markets are doing something dramatic, then many investors feel they need to match that dramatic action. Perhaps by selling their shares. Or even by avoiding buying quality shares when they are 'on sale'.
He even cites Buffett's example:
We should know from some of the most-successful investors of all time, including Warren Buffett, the buy-and-hold strategy is a proven approach to do well in the market. You don't need to trade just for the sake of trading, and if you are forcing it, something is likely awry.
Concluding, Wong states that keeping one's eye on our own behaviour can be one of the best paths to long-term success in investing. Here's some of what he finished with:
While a volatile market can be a confronting challenge for investors to navigate, we can't let our fear dictate the decisions we make, nor the actions we take…
No matter your investing style, if you allow fear and action bias to have an influence over your mindset, you are no longer investing rationally but rather, emotionally… Remember, there is no need to be active in the market just for the sake of it. Patience and discipline are arguably the most fundamental mechanisms to combat action bias and deliver consistent returns over time.
Wise words indeed. And some points that we arguably all should keep in mind during these confronting and intimidating times.
