Stop Hitting The Panic Button On Your Investments

Every time you hear that the market’s taking a downward turn, you get the itch to sell your stocks, cash out your investments and hide in a hole, right? Turns out panic almost never helps investments.

Photo by wackystuff.

Here’s an uncomfortable reality: All investments require risk. In fact, if you long-term investments of any kind, it’s guaranteed that at least some days your portfolio will go down some amount. Years of movies have taught the average investor that investments going down means it’s time to jump out the tallest window you can find. As personal finance site Money Ning points out, though, all that panic button does is cause more chaos. It might even cost you more money in the long run:

Take the recent market volatility for example. I know a few guys who were scared of the downturn and moved some money into cash in February, only to see the market zoom back up a good 10% in the last four weeks. The worst part is that these people don’t really track their performances, so they will likely do this over and over again. There’s a reason why we urge everybody to stay the course. Doing nothing is actually not easy, but it’s often the most profitable non-action you can ever take.

More often than not, unless you have all your eggs in a single company’s basket (diversified index funds can help fix that problem), the market will bounce back from even major downturns. Pressing that panic button, though, means you’re committed to losing now. If you press it, any losses you’ve seen become real. If you wait, the market can recover and you’ll never actually “lose” that money.

Surely there are some good times to sell your investments though, right? Of course! But they rarely involve panic. Making a down payment on a house, or paying for a major medical expense are good reasons to sell. You can also feel safe selling if you’ve reached retirement age. However, panic is rarely a good reason. The proper way to avoid losses isn’t panic, it’s making sure you have a diversified portfolio and have gauged your risk tolerance beforehand.

Loss Aversion and Overconfidence Predict Investing Mistakes [Money Ning]