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Did you panic during the last market downturn? When to return



Panic selling often occurs during stock market lows, and those who abandon their investments may later regret their decision.

The biggest problem, however, is getting back into the market after a ‘panic’, 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 shed assets during volatile times.

Men over 45 who are married with children and who say they have “excellent investment experience or knowledge” are more likely to panic when stock markets fall, research shows.

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

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While the research hasn’t looked into why some investors are more prone to impulse selling, they have found another alarming trend: Many panicked sellers don’t reinvest after making withdrawals.

As of December 31, 2015, more than 30% of investors who sold assets in panic after previous downturns never returned to the stock market. the paper found.

This is a problem because those who exit the stock market and do not return miss the recovery. In fact, the best returns may follow some of the biggest declines, according to a Bank of America study.

Since 1930, missing the top 10 performing days of the S&P 500 each decade has led to a total return of 28%. However, a person who has stayed invested through the ups and downs can have a 17,715% return, according to the company.

“The worst thing you can do is let the mistake of selling at the wrong time prevent you 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 took place

Before developing a plan to re-enter the stock market, experts say it is essential to explore the reasons why the panic sell may have occurred.

First, panic sellers may want to reflect on the event, their thinking process, their feelings and what they can learn from it, Northrup said.

“Diving a little deeper, was it the volatility that really hit you? ” He asked. “If so, maybe take a closer look at your risk tolerance.”

For example, if someone cannot handle market fluctuations, they may want to reconsider their asset allocation, perhaps shifting towards less exposure to equities, depending on their situation, has it. he declares.

But they must ask themselves if there has been a change in their core values, their goals and their reasons for investing. If the answer is no, they may not need to change their investment strategy, Northrup said.

Someone who sells in panic may also have a short-term need, which may have magnified their fear, said Teresa Bailey, CFP and wealth management strategist at Waddell & Associates in Nashville, Tennessee.

How to get back into the stock market

While the return to the market may pay off in the long run, experts say panicked sellers are often worried about when to reinvest.

“You have to be right twice,” Bailey said, because it’s hard to know when to sell and when to re-enter the market.

“Usually the emotion is amplified when you come home because you don’t want to make a second mistake,” she said.

Usually, the emotion is amplified when you bump into it because you don’t want to make a second mistake.

Teresa bailey

Wealth Management Strategist at Waddell & Associates

Some panicked sellers wait for assets to drop again before re-entering, which can only prolong their time out of the market, Bailey said. However, if they cashed in on the basis of a short-term news event, it’s important to look back.

The most common strategy is cost averaging in dollars, where someone puts their money back to work by investing at fixed intervals over time.

While research shows that investing a lump sum earlier may offer higher returns, the average dollar cost can help prevent emotional reinvestment decisions.

“If someone sold panic, he might tend to be very emotional with the investment,” Northrup said.

“It can be very difficult if someone is marked by some of the volatility and then misses out on some of the gains they might have gotten,” he said.

Try a combined approach

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Investors can also combine average dollar costs with a flat-rate approach, Bailey said, which may require professional advice.

For example, they can reinvest every week for eight to ten weeks and deploy a larger amount if the market goes down during that time, she said.

The tactic can allow someone to speed up their timeline to reinvest and come back to a lower point.

But whatever the strategy, it’s important to try to learn from previous mistakes and stick to the long-term investment plan.

“Over time, the data shows that if you stay invested, your pot of money will increase,” Bailey said.