INVESTING

Staying Calm Amid Panic Selling

The stock market is a fluid beast. Continuously influenced by current events and public opinion, prices of stocks and other assets are subject to exciting highs and stressful lows. Understandably, no one likes to lose money or feel like their investments have taken a turn for the worst. However, responding to fear in these moments can turn into behavior known as panic selling.

Understanding Panic Selling

Panic selling refers to the often irrational and rapid sale of stocks and other assets in the face of sharp price declines. Preferring to cut and run rather than face further potential loss, individuals sell their investments. According to a study conducted by the School of Economics at Hiroshima University, this widespread behavior then creates significant market volatility, disruptions in financial markets and consequences in the broader economy. More importantly, this behavior may also result in important personal consequences, such as disrupting the balance of your investment portfolio and becoming subject to short-term capital gains tax. Rather than experience these negative impacts of panic selling, there are advantages to staying disciplined and remaining with your initial investments during low periods.

Riding the Upswing

Just as markets fall, they also rise, and the market’s best days often follow its worst. As noted by Forbes, the economic shutdown accompanied by the outbreak of COVID-19 led to a major stock market crash including three of the worst drops in U.S. history. However, by the end of the year, the stock market experienced overall growth, as it rebounded from the initial panic. Following this principle, it can prove beneficial to believe in the market’s capacity to rebound, especially if your investment portfolio is diversified and business fundamentals have not changed since your initial investments.

Protecting Compound Interest

Typically, the longer you hold onto your investments, the more they will generate in return. This is because investment earnings are calculated using both the initial investment balance and the accumulated interest on that balance, known as compound interest. When succumbing to the urge of panic selling, compound interest on investments is disrupted, which will set back future growth. Instead of selling your investments during a short-term decline, pause and remind yourself that the highest yield will typically come from holding your assets over the longest period of time.

Sources:

[ https://pmc.ncbi.nlm.nih.gov/articles/PMC11927890/#pone.0315622.ref009 ](https://pmc.ncbi.nlm.nih.gov/articles/PMC11927890/#pone.0315622.ref009 ](url) )

https://www.forbes.com/sites/lizfrazierpeck/2021/02/11/the-coronavirus-crash-of-2020-and-the-investing-lesson-it-taught-us/

https://www.bankrate.com/investing/why-you-should-avoid-panic-selling-during-volatility/

https://www.nerdwallet.com/taxes/learn/taxes-on-stocks

https://www.wnyasset.com/how-panic-selling-damages-your-portfolio-and-what-to-do-instead/