Panic sales often occur when the stock market sinks, and those who dump investments may later regret their decision.
A study from the Massachusetts Institute of Technology found that even after the “freak out”, the big problem is returning to the market.
“Panic sales have been forecast, and there is a trend among those who dump assets during volatile periods,” said Chi Him Wang, a research co-author at MIT.
Men over the age of 5, married to children and say they have “excellent investment experience or knowledge”, are more likely to panic about selling when they dive into the stock market.
“It’s quite consistent over time that people with certain characteristics sell more often than others,” Wang said.
Although the study did not examine why some investors are more prone to emotional selling, they found another worrying trend: many panic-stricken sellers do not reinvest after going cash.
Paper As of December 1, 2015, more than 300% of investors did not return to the stock market in panic after the previous recession.
This is a problem because those who leave the stock market and do not re-enter miss recovery. In fact, the best returns could follow the biggest dips, according to a Bank of America study.
Since the 1930s, the S&P 500’s top 10 performance days have been missing every decade, with a total return of 28%. However, anyone who invests through ups and downs can have a 17,715% return, the company found.
Jake Northroop, a certified financial planner who founded Experience Your Wealth in Bristol, Rhode Island, said: “The worst thing you can do is make the mistake of selling at the wrong time to prevent you from making a profit in the future.” .
Why panic sales occurred
Before planning to re-enter the stock market, experts say it is essential to find out why panic sales have occurred.
First, panicked vendors can reflect on the event, their thought processes, feelings and what they can learn from it, Northrup said.
“Dive a little deeper, is it the instability that really affected you?” He asked. “If so, take a closer look at your risk tolerance.”
For example, if someone cannot sway the market, they may want to reconsider their asset allocation, possibly leading to lower stock exposure depending on their condition.
But they should ask themselves if there has been any change in their core values, goals and reasons for investing. If the answer is no, then their investment strategy may not need to change, Northroop said.
Teresa Bailey, CFP and asset strategist at Waddell & Associates in Nashville, Tennessee, said anyone who sells in panic may have a near-term need, which can increase their fears.
How to re-enter the stock market
While there may be long-term payments when returning to the market, experts say panic sellers are often anxious about reinvesting.
“You have to be right twice,” Bailey said, because it’s hard to know when to sell and re-enter the market.
“Usually, the emotion stretches around to get back because you don’t want to make a second mistake,” he said.
Bailey said some panicked sellers wait for assets to recede before re-entering, which could extend their time out of the market. However, if they cash out based on a short-term news event, it’s important to go back to it.
The most common strategy is the dollar-cost average, where someone invests their money over a period of time and returns it to work.
Although research has shown that investing in a month can give higher returns as soon as possible, the average dollar-cost average can help prevent emotional reinvestment decisions.
“If someone sells panic, they may have a tendency to get too emotional with their investment,” Northroop said.
“It can be really challenging if someone is hurt by some instability and then deprived of some of their benefits,” he said.
Try a coordination approach
iNueng | iStock | Getty Images
Bailey said investors can combine the dollar-cost average with a one-way approach, which may require professional guidance.
For example, they could reinvest for eight to ten weeks per week, and deploy even larger amounts if the market sinks within that time, he said.
The strategy may allow someone to speed up their deadline for reinvestment and return to a lower point.
But whatever the strategy, it’s important to try and learn from past mistakes and stick to a long-term investment plan.
“Over time, the data shows that if you invest, your pot of money will increase,” Bailey said.