Stock market volatility is high, and there are concerns about what could happen next. We had a debt deal, but our credit rating was downgraded anyway. Yesterday, Ben Bernanke basically indicated that the outlook for the U.S. economy has worsened, and today there have been rumors about French banks and their exposure to sovereign debt from Italy. All around the world, investors are looking for safe havens, and that is sending the U.S. dollar higher, even as U.S. stocks plummet for another day.

Of course, for many average Joes, this situation is scary. Many people are making the mistake of looking at the market, and looking at their portfolios/retirement accounts. And, as concern about market volatility increases, many are becoming involved in panic selling. This is a bad idea. Making any investment decision out of fear is usually a short road to ruin.

Problems with Panic Selling

Anytime you make a financial decision based on fear, you run the risk of your clouded judgement causing a worse situation for you. This is true of when you buy into a scam because you are afraid of “missing out” on a “great opportunity,” and it is true when you sell in a panic. Here are some of the negative results of panic selling:

  • Locking in losses: Selling now, when the market is lower, violates the first, great rule of investing: “Buy low, sell high.” If you panic into selling your investments with the market down, you lock in your losses. They used to be only “on paper,” but once you execute that sell order, they become “real.”
  • Missing out on the opportunity for bigger profits: Instead of selling, now might be the time to buy. (Or you might wait for an even bigger drop.) If you are so panicked that all you see is red, you might miss out on the chance to get some great bargains. More bang for your buck now often means higher profits later.

Before You Sell Just Because the Market is Lower

Before you make the panic-fueled decision to sell, take a step back. Consider why you are selling. Are you selling because the market has dropped? If so, you might want to re-evaluate the decision. Take a few minutes to analyze the fundamentals of the investment. Have they changed? If the fundamentals are the same, and only the market is different, you might want to hang on to the investment. Chances are that everything will be fine later on. Companies with strong fundamentals have a tendency to offer solid returns over time.
You can also consider other reasons to sell. In some cases, it might make sense to sell if you want to offset recent gains you received from the bull market earlier in the year. Tax loss harvesting can be a legitimate reason to sell during times of market decline. Additionally, this can also be a good time to evaluate your investment portfolio and see if more diversification is needed. Sometimes, volatility can help you see where your weaknesses lie.

Bottom Line

There are some good reasons to sell during periods of stock market trouble. However, fear is not one of these reasons. Rather than giving in to panic, you need to look at your overall financial plan for the rest of the year, and for a few years down the road. Consider the fundamentals of your investment, and change your outlook to one of opportunity-hunting rather than one of fear. Then, see if there is a way to turn recent stock market events to your advantage.