The easiest button in the world to press is the one labeled “Sell. ” It’s a good medicine for your emotional distress, especially in the face of a volatile, disruptive stock market. Panic selling may soothe your stomach or help you sleep better, but it can take a toll on your health Portfolio wreaking havoc.

Challenges of liquidating stocks: How are you going back? when? What drives your buyback decision?what metrics are you based on Buy above? ¹

We discussed why human nature makes this so difficult Bloomberg TV yesterday. My experience in this area has been shaped by investor behavior I observed during the 2008-09 financial crisis, the 2000 dot-com bust, and the 2020 pandemic sell-off.

There was some resistance, but the most interesting challenge came from a consultant who, in my opinion, was Sympatico: “I had a similar experience with you when it came to investor panic, and while I disagree with your position, I wish I had the data to back it up. “

This leads us to a very interesting study ² Focus on the questions that spook investors:”When did investors panic?Machine learning predicts panic selling. Note that this study is based on “the financial activity of 653,455 anonymous accounts from one of the largest US brokerage firms, corresponding to 298,556 households.” “

A key finding: “Investors who are male, 45+, married, or have more dependents, or who think they have excellent investment experience or knowledge tend to panic more often. “

But that masks the lead. From an advisor’s perspective, the more important question is what investors who panic-sell their stock portfolios then do. Here are the most important takeaways I found from this research:

“We found that 30.9% of investors who panic-sold would never reinvest in risky assets.”

Consider the impact of that startling data point: Nearly a third of investors who panic-sold Never buy stocks again. My experience is that many panic sellers will buy back stock at a higher price than they were selling, and usually late in the recovery, when the news improves (and is confirmed by research). When the headlines are shocking, the market tends to bottom out, leading to a capitulation.

This is very consistent with our experience after the financial crisis. I can’t count how many times I’ve heard this:”I followed you out of the market in 2008 but when you turned bullish in March 2009 I thought you were crazy. “We got similar emails in 2010 and still in 2011, December ’13, ’14 and (shockingly) even 2015.

It’s easy to sell, hard to come back, and very expensive not to come back.

Before:
If you sell now, when will you be back? (March 23, 2022)

do not panic! (apologies to Douglas Adams) (March 9, 2020)

Anecdote is the plural of data (February 4, 2019)

Have a plan and stick to it. (2 July 2016)

resource:
When did investors panic?Machine learning predicts panic selling
By Daniel Elkind, Kathryn Kaminski, Andrew W. Lo, Kien Wei Siah, and Chi Heem Wong
Journal of Financial Data Science Winter 2022, 4 (1) 11-39; DOI:
https://jfds.pm-research.com/content/4/1/11

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1. There is a longer discussion on the tax consequences of ineligible accounts. The simple math is that you have to overcome the huge hurdle of long-term capital gains of 23.8% (20% plus 3.8% Affordable Care Act net investment income tax) to break even…

2. Hat tip Larry Swedroe and Evidence-Based Investor.