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How to Avoid Panic Selling

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One of the biggest temptations when you see the Dow drop 500 — or 600 — points in a day is to become involved in panic selling. Everything seems to be crashing, and it seems like the time to sell, SELL, SELLLLL! However, you need to keep a handle on your emotions, and stop and think. Once you sell at this point, you’re essentially locking in your losses.

Rather than letting panic dictate your investing plan, you should take a deep breath, a step back, and re-evaluate your gut reaction to sell. Here are some things to think about in order to prevent panic selling as the stock market drops:

Focus on the Fundamentals

Before you sell your investment on a market drop, it can be a good idea to review the fundamentals. Has anything changed? Does the company still have the same profit potential? Is the management still competent? If there haven’t been any major changes to the fundamentals of the investment, you might consider hanging on to it; if it has been a solid performer, and has solid prospects for the future, selling just because the market drops can be disastrous. A good investment is likely to recover in time.

Do a Little Bargain Hunting

Instead of thinking of the stock market drop as a catastrophe, you can think of it as an opportunity. Many stocks are “on sale” during times like these, and you can make a profit if you buy low now, and sell high later. Some people think that the stock market might even go lower — and they’re excited at the prospect. One way to keep from knee-jerk selling is to change your thinking so that you see opportunities, rather than focusing on only the down side.

What if Selling is a Good Idea?

In some cases, selling might be a good idea. You want to be careful about it, though. Consider your reasons for selling. Are you concerned that the investment won’t recover from the crash? If so, you might sell. You might also want to sell at a loss in order to offset some of your capital gains for tax purposes. In some cases, you might even still be ahead on the investment, and you might need the money for some other purpose. Selling for a gain, before the market drops further, might be prudent in such a case. Just be aware of the difference between long-term capital gains and short-term capital gains, and the tax implications.

There might be some legitimate reasons to sell right now. However, selling just because the market is dropping, and you’re in a panicked state of mind, is rarely a good idea. Instead, it is important to really ask yourself why you want to sell. If you are selling because everyone else is, or because of the current volatility, it might be a good idea to re-examine your decision. Once you go into your brokerage account and sell, there is no taking that back. Consider your investment plan, and make sure that you are making the wisest decision before you lock in those losses.

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12 Responses to “How to Avoid Panic Selling”

  1. Dave says:

    I love it when the market has huge knee jerk reactions – it allows me to buy, buy, buy at super cheap prices.

    • Vic says:

      When the Dow was soaked in red, all I heard was “attention Kmart shoppers – Discounts in the equities aisle”. When there is blood in the streets, bring the mop and you’ll clean up.

  2. tbork84 says:

    I just think of how many more shares I will be buying now that the price has come down. Dollar cost averaging can be a soothing practice when you remind yourself how it works.

  3. Rosa Rugosa says:

    I just keep my hands over my eyes!

  4. daenyll says:

    watched IRA drop then come right back damn near even over the last 2 days. just wish I had some extra cash to grab up the lows right now, more shares and a long horizon. best to ignore volatility, invest rather than trade in this market.

  5. DIY Investor says:

    I agree with the commenters: buy low /sell high. Unfortunately too many individuals allow their emotions to take over.
    If you can’t sleep at night as the market gyrates then let a professional manage your money.
    Keep in mind that what is important is where the market is when you start to withdraw funds – this is true both when the market rises as well as falls!
    For those building a portfolio, market downturns are a gift.

  6. Cassie says:

    Know yourself.
    If you know you get caught up in the drama of market reporting do not subject yourself to the non stop nearly hysterical reporting on down days-turn it off.

  7. TheAcsMan says:

    Successful investing means leaving your emotions elsewhere. Those include greed, fear and envy

    The more consistently you can avoid those very human reactions to events the better your portfolio will do.

    I truly am more nervous about putting a single dollar coin into a slot machine than a 6 figure paper loss in a single day on my stocks.

    The reason that’s so is that I know my stocks will recover, but I’ll nver get that dollar bag from the casino.

    That philosophy can only be true if you entirely focus on shares in quality companies and religiously stay away from speculative stocks. In the case of a speculative stock once its time has passed it is not returning. So if you are on the losing side of such a position, don’t panic, but do sell.

    Otherwise, don’t panic and if you can, buy more shares and perghaps consider hedging strategies.

    • Vic says:

      6 figure loss? You must have a steel stomach! But I guess if you done your homework, then you really don’t have to sweat the day to day gyrations.

  8. Ned says:

    If you have a 6 figure lose in one day, that means your portfolio is worth… well lets just say you don’t need to work.


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