November 5, 2021

How much could an emotional investment decision potentially cost you?

By Ryan Campbell-Harris, Consulting Actuary

If you have been setting aside money for retirement, then you should be aware that saving for retirement is a long-term investment. You will probably also have heard something to the effect of, “Set a retirement investment strategy and stick to it.” Technically, it is advisable to ignore what the markets do over the short term and focus on growing your retirement nest egg over the long term.

However, for many members this is easier said than done, especially after what happened to the markets in March 2020.

According to Joel Bruckenstein, “It was an emotional knee-jerk reaction. People often sell in panic.” For retirement fund members who closely watch their retirement savings, March 2020 would have brought on a wide range of emotions. Watching one’s savings tumble by almost 20% in a matter of days could cause many to panic and switch to cash or a more conservative portfolio.

This was evident when we analysed the number of switches that occurred on a large retirement fund administration platform in March 2020. Comparing the first 10 days to the second 10 days of March 2020, when the market reached its lowest point, the number of investment switches recorded more than doubled, and the size of the assets switched almost tripled during that time.

Although the idea of switching to a more stable investment amid very volatile market conditions seems appealing, the impact of switching during or after a market crash and missing out on returns when the market recovers can be quite an expensive price to pay. Especially considering that within a year, the financial markets had more than recovered from the initial crash.

We know that hindsight is always 20/20, but fast-forwarding to a year later, 31 March 2021, we wanted to see what the impact would have been on a member’s retirement savings if the member had switched their investment to a conservative portfolio at the end of March 2020.


There are several factors that could impact the comparisons and we found that the most important ones were the size of the member’s retirement savings relative to salary, and the investment portfolio the member was invested in originally.

Our calculations were based on different scenarios, varying the size of the retirement savings relative to the starting salary as well as the original investment portfolio. For the purposes of the original investment portfolio, we looked at scenarios where the member was invested in one of several aggressive, moderate or passive portfolios.

We also considered different types of conservative portfolios like cash and smooth bonus, and found that the portfolios yielded quite similar returns over the period. So, for the purposes of our comparisons, it did not really matter which portfolio we used as the conservative portfolio.

Our findings

From our analysis, we could clearly see that in all cases considered, the final retirement savings amount at 31 March 2021 would have been significantly higher had the member chosen not to switch their investment in March 2020.

By switching to a conservative portfolio after the market crash, the member effectively crystallised the losses experienced. Furthermore, as a result of compound interest over the market recovery period, the impact of the crystallised losses after a year is much larger than the initial loss experienced.

We also found that the more aggressive the initial portfolio, the larger the loss experienced by the member who switched to the conservative portfolio immediately after the crash. The more aggressive portfolios achieved higher returns than less aggressive portfolios over this period. As a result, members who switched into conservative portfolios from aggressive portfolios missed out on the significant recovery.

Another observation was that the larger the initial retirement savings amount, the bigger the relative loss suffered after a year by the member who switched to the conservative portfolio. Our calculations revealed that, in certain instances, after a year, the retirement savings invested in the conservative portfolio were still lower than the initial investment. So even adding 12 months’ contributions and growth from the conservative portfolio, some members’ retirement savings were still lower than their value at 31 March 2020.

What can be learnt from these results?

Having switched to a conservative portfolio straight after the March 2020 market crash, one year later a member is far worse off than had they remained invested in their original portfolio. By locking in the losses experienced, the member is making a permanent change to their retirement outcome.

The results above are based on the benefit of hindsight, as nobody knew how long the market would take to recover after the crash. However, we have learnt from history that financial markets always recover from a market crash over the long term. So, the longer a member remains invested in the market, the better their retirement outcome will be, bearing in mind that the time horizon for a member close to retirement is very different from that of a younger member.

Sticking to a retirement investment strategy over the long term, should always have a better outcome than allowing the short-term outcomes and accompanying emotions to drive the retirement savings decision one makes. Always remember not to “make a permanent decision based on temporary emotions”. Members should speak to their financial adviser before taking any action.