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The Dangers of Selling During a Market Drop

Timing the market can be difficult – timing the market in a panic can be devastating.

Any time stocks experience a major decline after hitting all-time highs, it’s understandable if you feel a moment of panic. Are they going to drop further? Should you get out now and salvage as much of your portfolio as you can? Is it already too late?

In those moments, it’s worth remembering two things: We’ve seen major selloffs before, and acting in a moment of panic often creates more problems than it solves.

At its essence, panic selling is an act of timing the market – you’re making a decision (in this case, pulling your investments) in anticipation of what the market might do next (experience further declines). The problem is, even in moments of major losses, the future is still unknowable, and many investors who have sold off after a decline missed out on an ensuing bounce.

Consider this moment in recent history: On March 28, 2013, the S&P 500 made a new all-time high for the first time in over five years, having skyrocketed 132% from the depths of the financial crisis. And in the nearly seven years since then, the S&P 500 experienced more than 250 new all-time highs – amid all the geopolitical turmoil, economic strife and political uncertainty.

But over that same time, the market has spent roughly 1,500 trading days in various periods of drawdown, from -1% blips to -20% plummets. And each time, there were reasons to panic-sell. U.S. budget deficits, European debt crises, U.S. elections, Brexit, trade wars – the list is endless. If you panic-sold at any of these lows, you would have missed the next new stock market high.

 

Growth of money in S&P 500 since 1928

Despite experiencing several setbacks over the years – sometimes steep ones – the market has persevered.

Plus, selling after a drawdown introduces another issue – when to buy back in. Do you wait until the market starts to rebound, at which point you miss out on potential gains? How confident are you that the market won’t continue to fall after you’re back in? This is a second moment of market timing, which as we’ve discussed, is both incredibly difficult and impractical, as costs and taxes eat into potential gains.

Your risk tolerance, financial profile and life situation continually evolve, which means there will always be valid reasons to sell equities and rebalance your portfolio. And we encourage individuals to be opportunistic, long-term investors. That said, there’s something to be said about the old investing adage: Time in the market beats market timing.

If you’re feeling a moment of panic, be sure to reach out to your Baird Financial Advisor. They can offer sound, objective investment advice and guidance on making sure your portfolio is in alignment with both the current investing environment and your larger financial goals.