An expensive panic sale

What we can learn from irrational markets

Image credit: Authors graph

A central rule of investing money in the stock market is freuently summarized as “time in the market beats timinig the market”. The intuition here is that for most passive investors the best strategy is to buy and hold stocks irrespective of market movements as trying to buy low and sell high usually leads to unsophisticated investors getting it wrong more often than they get it right. Exchange Traded Funds (ETF) which allow investors to invest in a broad portfolio of stocks have therefore gained in popularity over the recent years. They carry very little fees compared to actively managed funds which make them an attractive investment to save money and invest over a long horizon (typically 7+ years), e.g. in order to save for retirement.

Germany, whose citizens are known for holding notoriously little stocks, the goverment created the so called “Riester Rente” (Riester pension) named after Walter Riester, one of its architects, in 2001 as an additional market based pension scheme which was subsidized by the government. Its basic rules are as follows:

  • Investors commit to investing until retirement
  • The broker (usually a bank or insurance company) guarantees the full amount investors paid in
  • The government subsidizes the product (both through making investments income tax deductible and by adding cents on each euro invested)

As with many financial products, many of these Riester products carried very large and usually hidden fees. For example, while signing up for a Riester pension is usually free, the money goes into an activiely managed fund with running fees as high as 2-3%. A noteable exception to this trend was the fairr riester product, which promised to invest in low-fee ETFs. The basic idea was simple: With a long investment horizon such as saving for retirement, an active investment strategy is not required and market volatilies can simply been waited out.

Unfortunately, fairrs partner bank Sutor bank, who is managing the portfolios, decided on March 12th 2019 to sell the entire stock portfolio after the market had lost about 40% in two weeks due to the Covid crisis. The marked reached its low on March 18th but only two days later recovered and markets closed above the March 12th closing price. It gained another regained 20% in the next months until June 12th which is when fairr/Sutor stared to reinvest in the stock market. This is not far from a worst case scenario: Selling low, not investing when stocks are cheap and then buying high again. The cost of this failed investment strategy is bourne by the investors. It is a prime example of the chilling effects that irrational behaviour can produce.

The codes and data can be access here.

Jannic Alexander Cutura
Jannic Alexander Cutura
Software ∪ Data Engineer

My interests include distributed computing and cloud as well as financial stability and regulation.