Panic selling often happens during stock market dips, and those who dump investments may later regret their decision.
The bigger issue, however, is getting back into the market after a “freak out,” according to research from the Massachusetts Institute of Technology.
Chi Heem Wong (MIT researcher) said that panic selling can be predicted and that there are certain trends in those who sell assets during volatile times.
Research shows that panic selling during market drops is more common in men over 45 who have been married and have children.
Wong explained that “it’s quite consistent over time” that panic selling is more common in people who have certain traits.
Although the researchers didn’t explore why some investors tend to be more inclined to panic sell-offs after they have gone to cash, there was another worrying trend.
More than 30% of investors who panic-sold assets after previous downturns never got back into the stock market, as of Dec. 31, 2015, the paper found.
This is a problem as those who abandon the stock market but don’t return miss the opportunity to benefit from the recovery. In fact, the best returns may follow some of the biggest dips, according to research from Bank of America.
Since 1930, missing the S&P 500‘s 10 best-performing days every decade led to a total return of 28%. The company discovered that someone who invested throughout the downs and ups could see a 17.715% return.
“The worst thing that you can do is let the mistake of selling at the wrong time hold you back from participating in some of the gains in the future,” said certified financial planner Jake Northrup, founder of Experience Your Wealth in Bristol, Rhode Island.
Before crafting a plan to re-enter the stock market, experts say it’s essential to explore the reasons why the panic sale may have happened.
Northrup suggested that panic sellers should reflect upon the incident, what their thoughts were and how it affected them.
To get a deeper understanding, what was the impact of volatility on you? He asked. If so, you might want to reconsider your tolerance for risk.
According to him, someone may need to reconsider their investment allocation and perhaps switch to less stock exposure if they can’t take market swings.
They should also ask themselves whether there has been any change in their investment goals, core values and motivations. Northrup stated that if the answer is yes, then they don’t need to change their investment strategy.
Someone who panic sells may also have a near-term need, which may have amplified their fear, said Teresa Bailey, CFP and wealth strategist at Waddell & Associates in Nashville, Tennessee.
While getting back into the market may pay off long-term, experts say panic sellers often feel anxious about when to reinvest.
Bailey said that it is difficult to determine when to sell or re-enter a market.
She said that emotions are often amplified by the desire to get back in, as you don’t want make another mistake.
Some panic sellers wait for assets to decline again before re-entering, which may only extend their time out of the market, Bailey said. If they cash out on short-term news events, however, it is important to return in.
Dollar-cost averaging is the most popular strategy. This involves putting your money back into work and investing at regular intervals.
While research shows investing a lump sum sooner may offer higher returns, dollar-cost averaging may help prevent emotional re-investment decisions.
Northrup stated that if someone panic sells, it might be more difficult to invest.
It can prove difficult to make investments if you are scared by volatility.
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Investors may also combine dollar-cost averaging with a lump-sum approach, Bailey said, which may need professional guidance.
They might, for example, reinvest once a week for between 8 and 10 weeks. If the market falls, they could deploy a greater amount.
This tactic can be used to accelerate their reinvestment timeline and allow them to get back in faster.
No matter what strategy you choose, the key is to learn from your mistakes and stay true to the long-term plan of investing.
Bailey explained that “over time data indicates that your money pot will grow if it is kept invested.”