The recent weakness of the stock market can be especially dangerous for your assets if you are male, over 45 years old, married, more dependent or think you have an excellent knowledge of investing.
This is because investors in this demographic category may react to market declines by panicking and “selling panicked”. And if you do, chances are you won’t return to equity until the stock market is much higher than where you stood at the time of the sale – so you can lose out on buying and holding.
In fact, according to a new survey, you may never return. About one-third of investors who “sell out in panic” completely shut down equity and do not re-enter the market. So they lose the long-term potential of the stock.
This new study will be important to review at any time, but especially now, due to the recent losses in the stock market. S&P 500 SPX,
The Nasdaq composite fell 16% from the end of March, while the comp
Both falls are unusually severe for such a short period of time, causing panic among many retirees and near-retirees.
Read: You’ve just retired and your target-date fund has sunk. What are you doing now
This new study appeared in the Winter 2022 issue Journal of Financial Information Science. The headline “When are investors embarrassed? Machine Learning Predictions for Panic Selling, ”conducted by several researchers at MIT’s Laboratory for Financial Engineering. Panic sales occur when an investor “intentionally sells a significant portion of his or her risky assets abruptly” and researchers specifically define it as a “90% loss of a family’s equity assets in a month, of which 50% or more is due to business.”
For the study, authors were given access to a data set containing more than 650,000 individual brokerage accounts between 2003 and 2015. The data set contains enough details for many account holders to allow researchers to relate to panic sales frequencies. Different demographic variables. They found the following variables to be related to such frequencies:
- Age Among people over the age of 45, “panic-prone sales tend to increase … younger investors are less likely to sell panic-stricken over a wide range.”
- Marital status. “Investors who are married or divorced are more likely to panic than other groups.”
- Gender. “Men are slightly more likely than women to … sell out in panic during high financial stress.”
- Number of dependencies. “Investors who are not dependent are less likely to panic about the sale.”
- Self-declared investment experience. “The chances of panic sales and freak-out are most pronounced if the investor has self-declared good or excellent investment experience.”
- Self-proclaimed investment knowledge. “Similar to investment experience, we see that investors who describe their investment knowledge as good or excellent panic sell in high proportions or go crazy.”
Why are the characteristics of this population related to the increased tendency to sell panic? This is difficult to answer, since interpersonal relationships are not the cause. Researchers do not try to answer.
But there is no doubt that many different factors cause these results. If I can guess, I can bet that an emotional tendency to panic plays a big role. It seems admirable that this trend is more pronounced among investors, who are older and therefore have less time to recover their portfolios from the bear market before retiring. This tendency can be strong even among those who have others to support them financially, explaining why marital status and the number of dependents are also related to panic sales.
I can bet that overconfidence plays a role, due to the weak adversity we all face when trying to do so in the stock market. This will explain why self-proclaimed investment experience and knowledge are related to panic sales. It will also explain the relationship between the sexes, as past behavioral studies have shown that men tend to be overconfident.
Whatever the reason, the researchers’ findings are strong enough to force us to pay close attention. Using artificial intelligence, the researchers created a model to predict whether an investor would be engaged in a panic sale, and they found that their model had an impressive success rate. This reinforces the conclusion that if you are one of the demographic departments associated with the high frequency of panic sales, you need to take special care to ensure that bear market time is not panicked and sold.
Those who are not in this particular demographic department should not be complacent. We are all capable of panicking, even if some of us tend to do it more than others.
The problem is panic, not selling
It is worth emphasizing that the reason for not panic at selling is not that it is never a good idea to sell. The problem is that we should not be in such a hurry to panic. If you sell according to a predetermined financial plan, then good for you. Your roadmap will definitely indicate when you should return and your challenge will be to follow the roadmap, not the second guess.
What you want to avoid at any cost is to find yourself in the middle of a bear market — like without a current street map. This is because your passion is hard to resist, and you will panic and be tempted to sell at any price. More often than not, you will eventually regret your portfolio decision.
Mark Halbert is a regular contributor to MarketWatch. His Halbert rating tracks investment newsletters that pay a flat fee for auditing. He can be contacted at [email protected].