Fisher Investments UK Reviews Selling at Breakeven

Fisher Investments UK knows that negative volatility can sometimes spur investors to make portfolio decisions they might not want to otherwise. Perhaps this is why, after enduring bear markets (prolonged, fundamentally driven broad equity market declines of -20% or worse), we find some investors choose to sell equities after they regain their prior highs or some other arbitrary level. They allow markets to recoup some or all of their declines, and then they exit equities. But Fisher Investments UK’s reviews of market history suggest this can be counterproductive for long-term investors.

In Fisher Investments UK’s experience, some investors who stayed in during a market downturn yield to the temptation to sell when equities break even – returning to their prior highs or some arbitrary portfolio value level. Why? Enduring downturns can be emotionally difficult, and many investors don’t want to go through them again. Behavioural finance studies suggest people dislike losses more than twice as much as they appreciate an equivalent gain.ⁱ So much so, they may be willing to go great lengths for the perceived chance of avoiding more. In this case, it may motivate some to sell equities at their prior high, or breakeven. Maybe that seems like a good exit point. This way, they didn’t lock in significant losses in portfolio value – and they dodge negativity they suspect could soon follow.

But this behaviour can have consequences for long-term investors, as Fisher Investments UK’s reviews of market history show new bull markets (long periods of generally rising equity prices) tend to climb well above their previous highs. For example, consider the bull market born after 2007 – 2009’s bear market. Global equities began falling in mid-October 2007, bottoming in early March 2009.ⁱⁱ A new bull market began, and equities rose 62.5% to regain their previous highs in early March 2010.ⁱⁱⁱ But equities kept on going, rising an additional 193.2% through the bull market’s end in February 2020.^iv Or consider early June 1990 – Fisher Investments UK will use the US-orientated S&P 500 index in dollars for illustrative purposes here, given its long history. At first, US equities fell rapidly – bottoming in just a few months.^v Then, a new bull market rose 26.6% to eclipse previous highs about seven months later.^vi Sure enough, the bull market marched on and US equities rose 410.6% through its end – rising much higher than their breakeven point.^vii If an investor sold at breakeven, they risked missing significant portions of these bull markets.

Another consideration: again using America’s S&P 500 for its long history, equities’ long-term annualised return is 10.0% – which reflects bear markets and bull markets.^viii Prior to 2022, S&P 500 bear markets have lasted about 24 months on average, with equities falling -39%.^ix Bull markets, on the other hand, last about 60 months on average, returning about 178%.^x In Fisher Investments UK’s view, staying invested is key over the long term, as it allows compound growth – or when investors earn a return on prior returns – to work. For example, consider investing a hypothetical €10,000 that earns 7% annually. After one year, that amounts to a €700 return. Keeping that return and principal invested the next year and earning the same 7% return brings hypothetical values to €11,449 after an annual gain of €749. Notice, instead of the €700 return in year one, year two delivered €749. That €49 is the return from reinvesting year-one returns. These extra gains may be small at first, but they add up over time and can yield impressive results. With the hypothetical 7% annual return and no withdrawals, the investment would increase more than tenfold in 35 years. Even at half the hypothetical 7% rate, the principal investment would hypothetically triple. In our view, that is significant – especially in the long run.

For many investors who need long-term growth to finance their goals, these compound gains are crucial. Over time, earning them can help outpace inflation (broadly rising prices across the economy) and accumulate enough money to provide income in retirement, fund travel, support loved ones or any number of purposes. So we think it stands to reason that when investors buy equities for these purposes, they probably don’t initially think I will participate in a bear market, then get back to breakeven and sit out. In Fisher Investments UK’s view, it is more likely they originally targeted long-term, market-like returns. Thus, we think it is important to keep that original intent – and goal – front of mind. It can help investors avoid falling prey to behavioural errors like selling at breakeven.

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