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Experts say you’re not alone if you panicked during the volatile stock market this week and felt remorse.
Russia’s invasion of Ukraine The US stock market volatility triggered on Thursday, with Standard & Poor’s 500 It fell 2.6% before closing 1.5% higher. The Nasdaq Composite It recovered from a drop of nearly 3.5%, up about 3.3% in the same session.
While some investors Searching for opportunities Amid the turmoil, others are holding back by selling assets. However, returning to the market after a panic sale can be problematic, according to research from the Massachusetts Institute of Technology.
Although the research didn’t examine why some investors are more prone to impulsive selling, they did find a worrying trend: Many panicked sellers don’t reinvest after going into cash.
A research paper from the Massachusetts Institute of Technology found that more than 30% of investors who panicked sold assets after previous recessions had never returned to the stock market, as of December 31, 2015.
It’s a problem because those who leave the stock market and don’t get back in are missing out on recovery. In fact, the best returns may follow some of the biggest declines, according to Research from Bank of America.
Since 1930, missing the 10 best performing S&P 500 days each decade has generated a total return of 28%. However, the company found that someone who stayed invested through ups and downs could generate a return of 17,715%.
“The worst thing you can do is let the mistake of selling at the wrong time prevent you from participating in some future gains,” said certified financial planner Jake Northrop, founder of Experience Your Wealth in Bristol, Rhode Island. .
Before returning to the stock market, experts say, it is necessary to explore the reasons why panic selling occurs.
First, panic sellers may want to think about the event, their thought process, their feelings and what they can learn from it, Northrop said.
“Dive a little deeper, was it the fluctuation that really affected you?” Asked. “If that’s the case, you might take a more serious look at your risk tolerance.”
For example, if someone can’t stand market volatility, they may want to reconsider their asset allocation and perhaps focus on lower equity exposure, depending on their situation, he said.
But they have to ask themselves if there is a change in their core values, goals and reasons for investing. If the answer is no, Northrop said, they may not need to change their strategy.
A panic seller may also have a near-term need, which may have heightened their concerns, said Theresa Bailey, chief investment expert at CFP and chief wealth analyst at Waddell & Associates in Nashville, Tennessee.
While a return to the market may pay off in the long run, experts say panicked sellers often worry about when to reinvest.
“You have to be right twice,” Bailey said, because it’s hard to know when to sell and re-enter the market.
“Usually, feelings about going back are inflated because you don’t want to make a second mistake,” she said.
Bailey said some panicked sellers are waiting for assets to dip again before re-entering, which could only prolong their time out of the market. However, if they cash out based on a short-term news event, it’s important to get back in.
The most common strategy is dollar cost averaging, where someone puts their money back into the business by investing at fixed intervals over time.
While research shows investing a lump sum sooner May offer higher returnsdollar cost averaging may help prevent emotional reinvestment decisions.
“If someone is panic selling, they may have a tendency to be very emotional with the investment,” Northrop said.
“It can be really hard for someone to have some volatility and then lose some of the gains they could have,” he said.
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Bailey said investors may also combine a dollar averaging cost with a lump sum approach, which may need professional guidance.
For example, they might reinvest every week for eight to 10 weeks and use a larger amount if the market goes down during that period, she said.
This tactic may allow someone to speed up their reinvestment schedule and come back at a lower point.
But no matter the strategy, it is important to try to learn from past mistakes and stick to a long-term investment plan.
“Over time, the data shows that if you stay invested, your money will grow,” Bailey said.
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