Major market moves shouldn’t make you panic
The stock market’s instantaneous 1000 point drop on Thursday led to a round of panicked selling by people concerned about their investments. Obviously, this type of stock market move is tough to stomach, as investors lost billions of dollars within the span of 30 minutes. However, if you use history as a reference, the worst thing that you could possibly do in the event of a major market drop is to sell in a panic.
The cost of selling in the market panic on May 6th
Making a spur of the moment sale based solely on emotion can have long term ramifications. In the graph below, you can see where the S&P 500 dropped from right around 1,160 to 1,065 rather quickly.
So, if you took the worst case scenario and sold at the bottom of the market drop, you would have missed the resulting rebound which occurred afterwards, in effect, losing money by not participating in the markets move back up. In essence, if you didn’t panic and sell, you would have been back to your previous amounts in 2 days. Equally as important is the fact that for every 10% drop, you would have to make up nearly 12% to get back to even. This figure accelerates as the drop is more severe.
Examples of Selling in a Market Panic:
- You sold at a 10% drop at 1065
- You would have to gain 11.1% back to get to the original point of 1160.
- If you sold in 2008 when the market was down 40%
- You would have to gain back 66% to get back to even.
So, by selling out of your investment accounts, and not participating in the gains back up, you forgo a tremendous amount of return on the way back up.
Herd mentality is almost always harmful
It is especially helpful when illustrating how important it is to stay invested as opposed to selling in a panic, or even selling in general as a result of trying to time the market. This scenario describes how your returns would be affected by missing the best 5, 10, 15, 20, 25, and 30 days of the market over a 10 year period. By missing the best 5 market days over a 10 year period, it would affect your returns by 3% per year over the 10 year period!
Please don’t sell your investments in a panic
Hopefully these examples show you how it is best to keep a level head during times of market volatility. It is hard to stomach losses, but always remember, a loss is never an actual loss unless you make the decision to sell. Otherwise, it is just a loss on paper.