Investors experienced increased levels of stress as a result of market volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition caused by the COVID-19 pandemic. The 2020 OSC Investor Experience Research Study provides a glimpse into investor reaction and behaviour during the early months of the crisis. There were correlations between financial knowledge and selling behaviour. Individuals with lower levels of financial knowledge were much more likely to sell at this time. Financial knowledge was measured using a five question quiz. It should be noted that we do not have sufficient data to know whether the sale was in their interests or whether they sold due to financial hardship.
How many investors experienced stress?
The study found approximately one in ten (8%) investors experienced a high or very high level of stress when thinking about their investments prior to the pandemic. However, as market volatility increased due to the pandemic, than number experiencing high or very high stress jumped to 20% with almost half of respondents having reported an increase in their stress levels.
Those who had a high level of stress about their investments are significantly more likely to have sold. Overall, 7% of investors sold off 20% or more of their portfolios during the recent crisis. The overwhelming majority (85%) of investors held steady during the market volatility and had not sold any of their investments, despite almost half of investors experiencing increased stress when thinking about their investments.
Stay the course
If you panic sell, you could risk locking-in investment losses and missing out when markets eventually recover. While it may not seem intuitive, short-term market volatility may not be much cause for concern if you have a long-term investing horizon as historically, markets tend to go up over time. It may be the case that many individuals who sold did not panic sell but rather were forced to sell in order to obtain funds to pay for necessary expenses.
Market volatility is a larger concern as you get close to your goals, such as retirement. Learn how you can adjust your asset mix to lower your investment risk over time.
Market volatility is unavoidable and indeed, it’s expected. A well-defined investment plan can help you navigate short-term volatility while staying focused on your long-term financial goals. It can prepare you for the normal ups and downs of the market, and to take advantage of opportunities as they arise.
Handling market volatility
One of the most effective ways to help protect against investment risk and reduce the impact of market volatility is to have a diversified portfolio and rebalance it over time. A diversified portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition will typically contain a mix of assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition classes, like stocks and bonds from different companies, industries and countries.
Financial literacy and investor education can help reduce investment stress. Whether you work with a financial advisor or invest on your own, having a better understanding how of investment products and the overall market works will lead to better, informed investment decisions.
Improving your financial literacy will take time, but it isn’t hard. Start by learning the basics.