COVID-19 has, in one way or another, affected almost every person in the world.
Travel bans are in place; businesses are struggling and governments are trying to keep economies afloat. It's truly unprecedented and the current sentiment is reflecting the fear and uncertainty of what lies ahead.
When the economy experiences a downturn, it's human nature to feel scared and fearful of the future.
People are inherently risk-averse and become anxious at the thought of losing their wealth.
This mindset causes everyday investors to panic at the first sight of bad news and sells their assets in an attempt to “cut their losses” and get out before a catastrophic collapse in values occurs, known as 'panic selling'.
Panic selling is a knee-jerk reaction that, in most cases, is an unfavourable investment decision.
Here are some reasons why it's a bad idea to “panic sell” your assets at the first sign of economic uncertainty.
1. Most economic downturns have been followed by a rebound
Looking back, Australia’s property market has traditionally done relatively well during global economic shocks.
Seen in the graph below, Australian property prices rallied following the various economic declines such as the 1987’s Black Monday, the “Dot-Com’ Bubble and the Global Financial Crisis .
Economic downturns are a natural part of the economic cycle and investors should understand this when deciding to purchase or sell their asset/s.
2. You only lose when you sell
It's vital to understand that an investor will only realise a gain or loss on the investment when the asset has been sold.
Many successful investors credit their wealth to holding onto their assets for the long term, even during recessions.
If an investor decides to panic sell due to their asset dropping in value, they are most likely “buying high, selling low” – a complete contradiction of the fundamental goal of investing.
3. It's not part of the plan
Before selling, an investor should consider why they purchased the asset in the first place.
The majority of investors have a long term goal in mind. All property investors should have a minimum 5-year plan.
At the same time, investors should exercise caution by selecting assets that have strong cash flow positions, appropriate insurances in place and also contingency plans such as maintaining a cash buffer in place.
History shows, those that have risk mitigation strategies in place and can resist the urge to give in to “panic sell” in periods of economic decline have been able to weather the storm through to the other side to see the uplift in values that occur in the recovery.
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James Allnutt – Property Investment Consultant
P: (02) 9939 3249