Here’s when to get back into the market after a panic sell
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You’re not alone if you panicked sold during this week’s stock market volatility and feel regret, experts say.
Russia’s invasion of Ukraine sparked swings in the US stock market on Thursday, with the S&P 500 falling as much as 2.6% before closing up 1.5%. The Nasdaq Composite recovered from a nearly 3.5% drop, rising about 3.3% in the same session.
While some investors are looking for opportunities amid the turmoil, others are pulling back by selling assets. However, getting back into the market after a panic sell can be a problem, according to research from the Massachusetts Institute of Technology.
Although the research didn’t examine why some investors are more prone to impulse selling, they did find an alarming trend: Many panicked sellers don’t reinvest after going cash.
More than 30% of investors who sold assets in a panic after previous downturns never returned to the stock market, as of December 31, 2015, according to the MIT research paper.
This is a problem because those who leave the stock market and do not return miss the recovery. In fact, the best returns can follow some of the biggest declines, according to research from Bank of America.
Since 1930, missing the 10 best-performing days on the S&P 500 each decade has led to a total return of 28%. However, someone who stayed invested through the ups and downs can have a 17,715% return, the company found.
“The worst thing you can do is let the mistake of selling at the wrong time keep you from participating in some of the future gains,” said certified financial planner Jake Northrup, founder of Experience Your Wealth in Bristol, Rhode Island. .
Why Panic Selling Happens
Before re-entering the stock market, experts say, it is essential to explore why the panic selling may have occurred.
First, panic sellers may want to reflect on the event, their thought process, their feelings, and what they can learn from it, Northrup said.
“Dipping a little deeper, was it the volatility that really impacted you?” He asked. “If so, maybe take a closer look at your risk tolerance.”
For example, if someone can’t handle market fluctuations, they may want to reconsider their asset allocation, perhaps moving towards less exposure to equities, depending on their circumstances, he said. declared.
But they need to ask themselves if there has been a shift in their core values, goals and reasons for investing. If the answer is no, they may not need to change their strategy, Northrup said.
Someone panic selling may also have a short-term need, which may have amplified their fear, said Teresa Bailey, CFP and senior wealth strategist at Waddell & Associates in Nashville, Tennessee.
Re-enter the stock market
While getting back into the market can pay off in the long run, experts say panic sellers often feel anxious about when to reinvest.
“You have to be right twice,” Bailey said, because it’s hard to know when to sell and re-enter the market.
“Usually the emotion is amplified around the comeback because you don’t want to make a second mistake,” she said.
Some panicked sellers are waiting for assets to drop again before re-entering, which can only prolong their absence from the market, Bailey said. However, if they cashed in based on a short-term news event, it’s important to roll back.
The most common strategy is dollar-cost averaging, where someone puts their money back to work investing at set intervals over time.
Although research shows that investing a lump sum earlier can provide higher returns, cost averaging can help prevent emotional reinvestment decisions.
“If someone panicked, they might tend to be very emotional about investing,” Northrup said.
“It can be very difficult if someone gets scarred by some of the volatility and then misses out on some of the gains they might have had,” he said.
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Investors can also combine dollar-cost averaging with a flat-rate approach, Bailey said, which may require professional guidance.
For example, they can reinvest weekly for eight to 10 weeks and deploy a larger amount if the market drops during that time, she said.
The tactic can allow someone to accelerate their timeline to reinvest and return to a lower point.
But whatever the strategy, it is 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 kitty will grow,” Bailey said.