Between the economic uncertainty caused by COVID-19 and one of the most polarizing elections of our country’s history, we have seen more fluctuation in the market than in recent years.
While fluctuation is normal, it can cause people to make decisions that may not be the best for them. One form of this is “panic selling.”
What is panic selling?
Panic selling is a moment where an investor or a group of investors decides that they want to go completely to cash and they sell everything they have in the market—regardless of the quality, efficiency or effectiveness of their holdings, and often without regard to taxation. Basically, they just throw up their hands and sell everything.
There are many reasons why that is typically a very bad idea anytime, and it can be even worse during a crisis when a lot of people are panic selling.
What does it mean for investors?
Panic selling drives the price of securities down in a way that is artificial—the price reduces but the quality does not. That means if 1,000 people are all panic selling and trying to sell off everything at once, someone out there (usually an institution, a hedge fund or a wealthy individual) is going to be able to buy those high-quality securities at a much lower price.
As prices are driven down, more panic sets in and we get stuck in a vicious cycle.
How does this affect me?
Does other people panic selling affect you personally? Yes.
Let’s look back at November 2008 when we got hit by the Great Recession. U.S. equity markets dropped by 38% in six weeks and an enormous amount of fear washed over the country. People who never paid attention to stock markets whatsoever were suddenly watching CNBC, reading about the Dow, S&P and NASDAQ were doing, and there was this incredible fear that the entire system was going to collapse.
Banks were failing. Bank of America was bailing out Meryl Lynch. We had all these big companies that were on the cusp of extinction. Naturally that caused an enormous amount of fear which led to a lot of panic selling—the most I’ve ever seen in my almost 30-year career.
People were selling their stocks at the bottom of the market. They got a terrible price on everything they owned so they locked in losses that were profound. Plus, they had to pay trading costs and may even have had taxable gains that got wiped out. There was a total disconnect between rational decision-making and emotional reaction, and they were left with the psychological torture of trying to figure out when it would be safe to buy back in.
The market that dropped nearly 40% had already rebounded 10, 20, 30% or more before some of these people bought back in. If they had just done nothing, they would not have lost ground. They would have lost time, but they wouldn’t have lost money. Instead, they sold at the worst conceivable time, bought back at an ill-advised time and all of that time they spent on the sidelines was recovery they missed. Those who held on and said, ‘I’m going to do nothing, I’m going to wait for this to recover,’ may have lost two, three, four, or even five years in some cases, but now over decade later they have recovered–and then some. People who were planning to retire or were close to reaching financial independence had to wait to hit that mark by a few years, but they still hit it.
Those who engaged in panic selling in late 2008 may never hit financial independence. They’ll never fully recover.
Instead of learning from 2008, some people did the same thing when we saw the market drop at the start of COVID.
Learn from the mistakes of others.
We’re going to see a lot of market fluctuation in the near future and beyond. Avoid being in that camp of people who are selling off their stocks just because they’re afraid. If your portfolio has been designed properly, you can withstand a drop in the market.
If you’re older and retired, you should have enough money for the income that you need. If you’re young, market drops are a great opportunity to buy those high-quality securities while they’re basically on the clearance rack.
What panic selling really does to long-term savings is to destroy it. It’s one of the biggest mistakes investors can make.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Brotman Financial Group, Inc. and BFG Financial Advisors are not affiliated with Kestra IS or Kestra AS.
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