Amid market turmoil, there’s a term that analysts often start throwing around: investor or market capitulation.
It generally means a point at which investors throw in the towel and sell, basically giving up on the asset and the hope of recouping lost gains. Generally, capitulation happens at a time with great uncertainty, market volatility and lack of confidence from investors.
“They’ve kind of figured that they’ve absorbed all the losses that they can, and they don’t see a future, so it’s finally time to pull the plug and get out,” said Jason Steeno, president at CoreCap Advisors & CoreCap Investments in Southfield, Michigan.
Usually, this kind of selling is based on fear, according to Shweta Lawande, a certified financial planner and lead advisor at Francis Financial, a New York-based firm dedicated to serving women, couples and those getting a divorce.
“They’re worried that they won’t be able to recapture the money that they lost by holding the stock,” she said. “All of that selling among investors causes the price of the stock to fall even further.”
What comes after capitulation
It is something that analysts and big investors watch for because it can point to the bottom of a down market cycle, potentially signaling better days ahead. But it can be difficult to identify when it’s happening and is more easily spotted in retrospect.
“What that short-term drop is usually followed by is a rally in the stock price,” said Lawande, adding that this upward movement locks in losses of those who sold on the downswing.
For most retail investors who are saving and putting money in markets for the long term, it can be a scary moment, but one that warrants little action, according to financial advisors.
“I’m a huge believer in staying invested,” said Steeno, adding that it’s been shown many times that if you pull assets out on the market’s worst days, you miss some of the best recovery days which can hurt your portfolio in the long term.
In addition, market downturns can also be opportunities for investors, said Lawande.
“If a stock is being drawn down by investors reacting to fear, this might be a good time to purchase that stock in their portfolios so they can take advantage of the lower price,” she said. She pointed out that investors that sell at a discount can harvest those losses for tax purposes to offset gains that they have in the future.
Stick with your plan
Of course, this can be easier said than done when markets are so choppy.
In this situation, Steeno advises that his clients return to their plan, which was generally made when markets were performing better and there was less emotion involved.
“The reason there’s a plan is for times like this,” he said.
Lawande also advises clients to check in with their emotions during market downturns. If they’re having trouble sleeping at night because they’re so anxious about losing money, it may be a sign that they’re taking on too much risk. If that’s the case, they should rebalance their portfolio to protect against sharp losses, she said.
She also said that today’s market environment is a particularly difficult one because so many assets are being hit at once.
“Almost every area of their portfolio is battling volatility, and that’s not something they’re used to seeing,” she said. To combat this, she recommends focusing on what you can control and sticking to your strategy.
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