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Is There Ever a Good Reason to Panic Sell?

"Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." Peter Lynch, famous investor.

The below exchange occurred last week between a client and a Pure Portfolios advisor.


I'm tired of this crap. The market is overvalued. The Fed is going to raise interest rates. Congress is a flaming dumpster fire. COVID is still screwing up global supply chains. Inflation is going to ruin everything.

Stock prices are starting to get more volatile.

I want you to sell everything.




I forgot to mention, I'm not working. I'm going to need to live off my taxable portfolio.

These conversations flare up when the markets start to act squirrely.

We define "panic-sell" as aborting your long-term investment plan and making the emotional decision to sell stocks.

Empirical evidence would strongly suggest this is a terrible decision. Investors that panic-sell end worse off virtually 100% of the time.

However, there is a nugget in the above exchange that caused me to pause...

Is there ever a good reason to abandon your long-term investment plan and panic sell?

According to a MIT study, male investors who are over the age of 45, married, and consider themselves as having "excellent investment experience" are more likely to freak out and dump their portfolio during a downturn.

Investors in this demographic often have had success in their careers, and extrapolate that expertise into investing. It's an interesting mix of overconfidence, above-average intelligence, and emotional biases. Most investors in this camp are externally focused on things outside of their control.

Most external things i.e. interest rates, valuations, politics, etc. that investors worry about are noise. They might be intellectually stimulating to look at, but they offer zero insight into what the market does next.

There are internal factors that could change your capacity to take on risk. For example, loss of employment, major healthcare expense, buying a second home, starting a business (see Internal vs. External Focus).

The above are reasons to dial back risk in your portfolio, but you might say that panic-selling seems extreme.

An investor might know that their capacity to take on risk has changed for one of the above reasons, but are content given the handsome returns in stocks. Once equity markets start to show cracks, they abort mission unwilling to take a loss.

We've seen it time and again.

If you're feeling the itch to get out of the market and your financial situation has not changed (you're worried about external things), consider...

You're invested incorrectly. Negative market returns are part of investing. You don't get to enjoy endless gains without the pain of loss from time to time. Go back to the drawing board and identify your acceptable range of investment outcomes (you can use our free tool here).

When you sell, you'll feel great. The daily mental warfare has stopped. However, selling is part one of a two-part decision. You're almost guaranteed to get the second decision wrong: when to get reinvested.

If you panic sell and happen to be right, you're going to do it again. You're setting yourself up to make a large allocation decision in the future. The more emotional decisions an investor makes, the more likely they're going to be wrong (often when the stakes are higher).

Setting up a trading account with a small percentage of your investable assets. Express your market views. Trade. Speculate. This is a small nod to your inner emotional monster. We call it Scratching your Degenerate Itch.

If it's a taxable account with embedded capital gains, the decision to sell could leave you saddled with a large tax bill at year-end.

In the moment, a market sell-off is the scariest event on Earth. In hindsight, we look back at every market sell-off as an obvious opportunity. "I should have bought stocks, I knew the market would come back!"

If your financial situation has changed and you have internal focus, i.e. loss of employment, starting a business, healthcare expense, etc. consider...

Panic selling might be reasonable, but there are better approaches. Dial back risk in your taxable portfolio. Don't wait for a market sell-off to reallocate.

If possible, leave your retirement assets alone (Roth IRA, Traditional IRA, 401k). These are usually long-term assets, let the magic of tax-deferred compounding do its thing.

Update your financial plan with your new life situation and investment allocation. You should be making asset allocation decisions within the context of your financial plan, not in a glass house of emotion.

Click here to learn how Pure Portfolios mitigates human bias in the investment process.

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