However, the key point is that the future will be different to the past and for the future we need robust strategies that give us the best chance of success. Quite apart from the bulk of historic evidence, it is also not hard to understand through general reasoning that for investments where greater than 10 per cent falls are very rare (most diversified investing), selling out after every 10 per cent drop guarantees that most falls are experienced while a lot of post-fall recoveries are missed.
Client composure
Bringing together the above strands, the 10 per cent drop rule is problematic because it is quite likely to damage client composure, and any selling as a result of that damage is very likely to harm long-term client returns and thus their long-term financial objectives.
However, to be forewarned is to be forearmed. Investment managers and the client advisers they work with already provide valuable behavioural coaching to clients during periods of market stress. They do, however, now need to go further and actively plan for how to best combat the negative effects of the 10 per cent drop rule when acting to preserve client composure in future.
Nic Spicer is portfolio manager of PortfolioMetrix
