Why equities are less risky during times of panic?

Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.

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People often associate times of panic with risk. People avoid the markets and hoard cash because of fear — fear of the supposedly higher risk during bad times.

Contrary to popular belief, market downturns are often not as risky as people think. Naturally, people associate a huge sell-off with risk. They see equity prices falling and as such avoid them because they believe they are risky.

But when everyone believes the market is risky, the market becomes inherently less risky because people become more risk-averse. And the more risk-averse the market is on average, the less likely prices are to be inflated. 

The lower the price, the lower the risk as you stand to lose less.

During times of strong market optimism, people tend to throw caution to the wind — investing in anything and everything, since everything is rising — both the good and the bad assets. This blurs the lines between high and low quality assets as everything is being pumped up.

While during market downturns, everything is being sold-off, depressing prices of both the good and bad assets. Similarly, this blurs the lines between high and low quality assets as everything is being pressed down.

However, a key difference between market exuberance and market panic is that you're much more likely to find better deals during times of panic than exuberance.

So even if you invest in the worng assets — low quality assets for example, you stand to lose much less compared to investing in the same low quality during times of strong market optimism.

In other words, market downturns presents great buying opportunities for both good and bad assets. And at the right price, any asset (both good and bad) can be a good investment.

In times of great market pessimism, people tend to be more selective and picky with what they invest in. And as such, prices are less likely to be inflated, lowering the overall market risk.

This is why it pays to invest in times of panic. Even if you make mistakes by buying low quality assets, you're likely to lose far less than buying them during good times.

Better still, if you can scoop up high quality assets during market downturns when their prices are depressed, you will stand to benefit a lot more than if you bought those high quality assets during good times.

The key is that timing is as important as the quality of assets you buy. In fact, timing can be even more important because you can still profit from low quality assets if bought at the right price. 

Every asset is investable at the right price.

And the great thing is that you don't have to get the timing perfect to profit. As long as you are investing in times of fear and panic, you won't be too far from the bottom. And even if the downturn is prolonged, you're still better off than buying these assets during an exuberant market rally.

In short, ensuring you accumulate quality assets in times of fear and panic makes your investments inherently less risky. Buying at the right time at the right price is key.

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Disclaimer:

The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.

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