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.