It may sound slightly morbid, but have you ever considered that dead people make some of the best investors? This isn’t because they’re making sound investment decisions from beyond the grave, but rather the portfolios of those who have died often generate the best returns.
According to The Motley Fool, Fidelity analysed its clients’ portfolios between 2003 and 2013 and found that the best-performing portfolios belonged to those who hadn’t touched their investments. Coincidentally, many of these thriving investors were already dead.
Of course, dying isn’t a sound investment strategy! However, it shows that a “buy and hold” approach to investing can often offer the best returns.
Continue reading to learn why this phenomenon occurs, and what you can learn from these “dead investors” before you shuffle off this mortal coil.
Some of the market’s worst days are often followed by its best, so inactivity is key
If the past few years have established anything, it’s that stock markets tend to be volatile. Following lockdowns imposed to halt the spread of Covid-19, markets understandably fell. After a period of recovery offered a glimmer of hope, supply chain issues and the war in Ukraine meant 2022 was another challenging year for stock markets around the world.
In fact, the Washington Post reports that the S&P 500 peaked on the first day of trading in 2022 and didn’t reach these levels again, making it one of the worst years since the 2008 financial crisis.
Often, when markets are especially volatile, some investors try to “buy low, sell high”. Of course, trying to time the market is almost impossible – even the highest-paid fund managers don’t get it right a lot of the time.
Instead, a “buy and hold” approach – when you ignore the panic when markets fall and leave your portfolio untouched – is often a way to ride out short-term volatility. After all, markets tend to rise in the long term.
Indeed, data from Nutmeg shows that if you picked one random day to invest and held the investment for 24 hours, your chances of positive returns would be 52.4%. If you held this same investment for 10 years, your chances of positive returns would climb to 94.2%.
The best days in the market often follow the worst days
Of course, it’s easy to feel concerned about your money when markets are in decline, and the desire to cash out is often prevalent. Though research has shown that some of the market’s worst days are often followed by its best days.
Indeed, statistics from J.P Morgan, as reported by CNBC, shows that the US stock market’s best day from 2002 to 2022 was 13 October 2008, with a return of 11.6%. Of course, this was right in the middle of the global financial crisis of 2008. The third best day was 24 March 2020 – the day after the UK went into a mandated lockdown!
The point here is that, had you reacted to the sharp market falls in each instance and exited the market, you’d have missed a significant rebound shortly after.
It shows that, in general, the market rewards inactivity – if you sell your shares when things seem precarious, you could miss the positive rebound.
Dead investors aren’t prone to cognitive bias
During volatile times, several cognitive biases also come into play.
For example, “loss aversion” suggests that humans feel the pain of losses twice as sharply as the pleasure of an equivalent gain. It can mean you take emotionally-led decisions in tough times that can hinder your progress towards your long-term goals.
These biases can sometimes affect the way you invest. So, when you take more of a backseat investment strategy and aim to “buy and hold”, you can potentially counteract them, and the value of your portfolio could benefit.
Really, the only ones that benefit from emotional responses to sudden market downturn are the brokers, who earn trading fees and commissions when you sell your position and try to buy the dip.
When you separate emotion from reason, you can adequately distinguish significant events from non-significant ones.
Speaking with a financial adviser is potentially one of the best ways to ensure that your portfolio can stand the test of time. Together, you can discuss your long-term investment strategy so you can comfortably take a “buy and hold” position when you invest.
At the end of the day, it’s very difficult to predict share price movement accurately. The old adage “It’s time in the market, not timing the market” has proven its worth and still rings true to this day.
Get in touch
When you have a solid long-term investment strategy, you can take a backseat approach to investing. To build one, please email info@blueskyifas.co.uk or call us on 01189 876655.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.