With the S&P 500 down close to 30% in one short month, investors are experiencing the fastest bear market in history as the world comes to grips with the coronavirus pandemic. 

While investors have felt the pressures and anxieties of market crashes a number of times over the past 20 years, events like the tech bubble, September 11 and the global financial crisis took months to develop. The speed and severity of this downturn could very well push investors to their emotional limit.

Long-term research from the Natixis Center for Investor Insight identifies five thoughts on how today’s downturn will shake the confidence of the average investor:

Investors are more concerned about safety than they think. Investors say they understand that volatility is part of investing, but they actually may be less comfortable than they think with volatile markets. For example, seven in 10 investors studied said they understand that market fluctuations of 10% are normal. Yet, after a decade-long bull market, roughly the same percentage consistently choose safety over performance. How investors respond going forward as their portfolios incur losses remains to be seen.

Those who know investors best doubt their capacity for handling risk. The vast majority of financial advisors surveyed say that investors are too focused on short-term returns and don’t recognize risk until it’s realized in their portfolios. Large numbers also say that investors resist rebalancing in up markets, when it’s time to take some winners. Given the severity of the downturn, rebalancing may be a painful lesson that shapes future behavior.

Investor expectations were unrealistic before the coronavirus pandemic. Investors said they expected double-digit returns above inflation, but financial professionals saw this as unrealistic even before the current market declines. Given their high expectations, investors are likely to be shell-shocked if the  market crisis turns out not to have a V-shaped rebound but instead makes a prolonged return to lower valuations.

Passive investors are learning that the tides rise—and fall. For years, investors have increased their holdings in passive funds, content to ride a rising market. However, while many investors loaded up on such funds because they saw them as a cheaper way to invest, many also assumed that index funds delivered additional benefits: Less risk, help in minimizing losses and access to the markets’ best opportunities. In reality, these funds aren’t less risky and can’t offer downside protection because they invest in every company, good and bad. Investors are learning that market gravity ensures that whatever goes up must come down.

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