Don't sabotage your portfolio by panic selling

“What do we do!? Panic!? Freak!? I usually panic, but I am happy to freak.” – Chidi, The Good Place

The market tanks. You’re checking your Schwab account way too often. Every time you do, the numbers get smaller. It hurts. Make the pain stop.

This always happens after the market has gone down >10%. I’ve had numerous conversations with numerous people over numerous years asking “Should I sell all my stocks?” The answer is always the same. No. Don't do it. That's called 'panic selling.'

New research shows how dangerous panic selling is. MIT smartypantses analyzed brokerage accounts from almost 300,000 households to examine it.

What did they find?

31% of investors who panic sell never buy again. If you panicked and sold all your stocks, 31% chance you never bought back in. This is a portfolio killer. It’s also very understandable. Panic selling feels good in the moment. You can always find a reason not to own stocks. You can be afraid the market will keep going down. You can be mad that you didn't see the downturn coming. You can be hesitant to repurchase your stocks at a higher price than you sold once stocks rebound. It’s hard to admit that you made a mistake.

There are lots of way to handcuff your financial goals. Not owning any stocks is one of the biggest.

We can predict who is most likely to panic sell. Are you male? Have kids? Consider yourself an experienced investor? Over the age of 45? Congratulations! You are the most likely to panic. Ironically, people who considered themselves expert investors were 2.4x more likely to panic sell as those with no prior investing experience – Dunning-Kruger in action.

What to do about it:

Put roadblocks between you and an emotional reaction. Add friction. Make it harder to sell. For some, a financial advisor fills that role. People develop tunnel vision when scared. An advisor can widen your focus toward the big picture.

Sell some (but not all) of your stocks. You can scratch an itch by selling something. Is your portfolio 70% stocks? Sell it down to 65%. You can feel like you’re taking action without jeopardizing your long-term goals.

If you sell, have a plan to buy stocks back. If you give in to the liquidation temptation, make a plan to get back in. Maybe you will buy 25% of your stocks back every month for the next 4 months. Maybe you buy when the S&P 500 goes back above the average price for the last 200 days. Stick to the plan.

In a future post, I will discuss an idea for how to turn feelings of panic to your advantage. Stay tuned. Don’t panic.