So far, and fortunately, most economic projections for 2025 are far from catastrophic, although experts believe there is a fair amount of uncertainty. Since a crisis can never be ruled out, we summarize a note from Julius Baer highlighting the five mistakes to absolutely avoid.
Diego Wuergler, Director of Investment Advisory, offers guidance on how to best face a crisis.
But let’s start with definitions: What is a market correction?
“A financial crisis is defined as a sharp market correction of around 40% to 50%, in contrast to a typical market correction, which usually ranges between 10% and 15%,” explains Diego Wuergler.
“In the past 25 years, we’ve seen three of these major corrections. So, we can do the math. Roughly every ten years, we could expect a significant market drop.”
Avoid These Five Investment Mistakes During a Crisis
Mistake 1: “Let’s sell for now and wait for the dust to settle.”
The equivalent for investors holding a lot of cash would be: “Let’s hold onto the cash and wait for the dust to settle.”
The alternative view: Instead of selling out of panic or waiting too long, it’s much better to build solid exposure structured around well-defined long-term investment themes from the start. Examples include investing in U.S. equities, automation and robotics, cybersecurity, energy transition, artificial intelligence and cloud computing, and longevity. Since these themes represent long-term structural trends, short-term market corrections should not undermine their underlying logic.
Mistake 2: “The market is wrong.”
The market is not wrong; we, as individuals, are wrong. At any given moment, the market reflects all publicly available information (fundamentals) as well as investor psychology (momentum).
The alternative view: Never fight a trend. Most of the time, several weeks or months later, we understand why the current market is trading at its levels. It’s better to listen to what the market tells us and adjust only when a trend changes. The current secular bull market began in May 2013. On average, such periods last between 16 and 18 years.
Mistake 3: “This time is different.”
This belief is a common trap in investing. We may have felt this way recently due to experiencing an unprecedented global pandemic, but the context is always different. For example, during the tech bubble of 2000, sky-high valuations dominated the conversation, while the 2008 financial crisis was marked by the collapse of the financial system, not the market itself.
The alternative view: What never changes in a financial crisis is our behavior or reaction, which is always based on greed and fear. Once the nature of market corrections is understood, it becomes much easier to control emotions and avoid making counterproductive decisions.
Mistake 4: “I can’t sell this stock at such a loss. Let’s hold onto it for a while and see what happens.”
Avoiding a loss (and holding onto zombie stocks) is one of the worst strategies, according to Diego Wuergler. Usually, “what happens next” is absolutely nothing, as these stocks go nowhere.
The alternative view: A crisis changes the world. It clearly defines the winners and losers, so you need to quickly sell the losers. Don’t hold onto cash but reinvest it in structural winners. An unrealized loss is still a loss. As Deputy Chief Investment Officer Michel Munz of Julius Baer also pointed out, the best way to recover quickly from previous losses is to ensure that what we have now will outperform in the future.
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