Did you panic sell during the latest market dip? When to get back in

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.

“Panic selling is predictable,” said co-author Chi Heem Wong, researcher at MIT, and there are trends among those who dump assets during volatile periods. 

Men who are over age 45, married with children and say they have “excellent investment experience or knowledge” are more likely to panic sell during stock market dips, research shows.

“It’s pretty consistent over time that people with certain attributes tend to panic sell more often than others,” Wong said.

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While the research didn’t examine why certain investors are more prone to impulsive sell-offs, they found another alarming trend: Many panic sellers don’t reinvest after going to cash.

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.

It’s a problem because those who leave the stock market and don’t re-enter miss out on 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%. However, someone who stayed invested through the ups and downs may have a 17,715% return, the company found.

“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.

Why the panic sale happened

How to re-enter the stock market

Some panic sellers wait for assets to decline again before re-entering, which may only extend their time out of the market, Bailey said. However, if they cashed out based on a short-term news event, it’s important to jump back in. 

The most common strategy is dollar-cost averaging, where someone puts their money back to work by investing at set intervals over time.

While research shows investing a lump sum sooner may offer higher returns, dollar-cost averaging may help prevent emotional re-investment decisions.

“If someone has panic sold, they might have a tendency to be very emotional with investing,” Northrup said.

“It can be really challenging if someone is scarred from some of the volatility and then missing out on some of the gains that they could have had,” he said.

Trying a combination approach

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