Stay Calm and Don’t Panic-Sell: How to Keep Your Cool During Stock Market Volatility

When stock markets become volatile, with frequent large ups and downs, it can be unsettling for investors. Seeing your investment portfolio value decline significantly triggers fears of loss and uncertainty. The instinct is often to sell holdings to avoid further drops. However, panic selling usually locks in losses and harms long-term returns. By understanding market volatility, controlling emotions, and sticking to sound investment principles, you can avoid emotional sell-offs during turbulent times.

A recent analysis by J.P. Morgan Wealth Management explored the detrimental effects of panic-selling stocks during turbulent markets. Their research examined the hypothetical growth of $10k invested continuously over 20 years in a broad market index. The results showed that an investor would earn over $60k in gains by staying invested without missing the best performance periods.

However, if an investor missed only the 10 highest single-day gains out of the two decades - likely by panic-selling - the total accumulated profits were nearly cut in half. This huge difference displays how even occasional panic-driven trading around volatility can enormously disrupt overall long-run returns.

The J.P. Morgan Wealth Management concluded that historical evidence strongly argues for maintaining stock investments through market drops rather than reacting with fear. Still, they advised all investors to thoughtfully weigh personal risk preferences and goals when considering decisions in volatile conditions. Acting rashly on emotions rarely leads to optimal outcomes. But those with enough fortitude to ride out storms have often enjoyed the greatest rewards later.

Market Volatility is Normal Part of Investing

Volatility refers to fluctuations in stock prices and trading volumes. It is a normal feature of healthy, functioning financial markets. No clear signal predicts when volatility will strike or how long it will last. Triggering events like economic developments, geopolitics, interest rates, inflation, etc. can be hard to foresee. Regardless of cause, volatility tends to subside over the long term.

Emotional Reactions Can Worsen Volatility

While volatility is normal, human psychology makes it harder to handle. Loss aversion causes us to fear drops twice as much as we crave gains. When seeing large stock market declines, our impulse fuels an emotional reaction that leads to panic selling.

It is important to note that the market is inherently volatile and driven by investor emotions in the short run. Emotions can lead you to make rash investment decisions that may be bad for your long-term returns. Giving in to fear can leave you out of the market and result in you missing out on the market’s best days.

This vicious cycle is why market drops often cascade instead of stabilizing. By understanding this tendency, we can consciously pause irrational urges.

Panic Selling Turns Paper Losses into Real Ones

When anxiety tempts us to sell holdings, it helps to remember panic selling locks in any on-paper losses as realized losses. Exiting the market prevents you from recouping unrealized paper losses when prices eventually rise again.

Selling during drops also causes you to miss out on the subsequent recovery. This disruption harms your long-term total returns – often significantly over 10+ years. By avoiding panic sell-offs during inevitable volatility cycles, an investor can earn superior returns over decades. Patience and discipline pays off.

10 Rules to Resist Panic Selling in Volatile Markets

When stock market volatility strikes, use the following reliable rules to reinforce discipline, control emotions, and avoid destructive panic-selling:

  1. Remember volatility is normal and temporary
  2. Focus on long-term time horizons
  3. Tune out short-term news noise
  4. Stick to sound investing principles
  5. Ignore daily price fluctuations
  6. Avoid constantly checking your portfolio
  7. Never sell solely based on price declines
  8. Reassess fundamentals driving long-run returns
  9. Consider rebalancing, not liquidating
  10. Seek trusted advice to stay disciplined

Avoiding panic-selling during market volatility is crucial to ensure that you don’t miss out on future gains. By understanding your risk tolerance and capacity, avoiding being overly emotional, and taking the steps outlined above, you can better protect your portfolio from market volatility and help you sleep better at night.

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