Panic selling is real and can be detrimental to your wealth

You may think an entrepreneur in the prime of his life with family responsibilities and a head for investing would be the last person to sell parts of his portfolio in a panic. But the truth may surprise you. A married, self-employed, 45-year-old male with children is probably most at risk of panic selling during times of crisis, according to a recent report from the Massachusetts Institute of Technology (MIT).

Panic selling is a distinct behavioural pattern that involves intentionally and abruptly selling off “a substantial proportion of [one’s] risky assets”. This practice doesn’t occur often but spikes during periods of financial crisis. Panic selling shouldn’t be confused with overtrading, which is all about too frequent trading that can be detrimental, or a stop-loss strategy, which relates to reducing holdings in risky investments once they reach a certain threshold.

Almost 300,000 portfolios between 2003 and 2015 were analysed in the MIT study. Several categories of people who might typically be more likely to panic sell during periods of high financial stress were identified. When it comes to the sexes, men are more likely to do so than women, neatly putting paid to the stereotypical theory that men are better investors than women. Married and divorced people are more likely to panic sell than single people, as well as those with families. And over 45s are also on the list.

Perhaps most surprising is that those who consider themselves to have first-rate investment knowledge or experience are also prone to panic selling. But we know that being a wise investor is not just about experience or knowledge. As the world’s most revered investor, Warren Buffett, puts it, what you really need is “the temperament to control the urges that get other people into trouble in investing”. And one of those urges could be the impulse to sell in a panic.

When it comes to job category, those who are self-employed, business owners or in real estate rank highest for risk of panic selling. This may also seem counterintuitive — surely those in such positions would have sound practical knowledge and the ability to make good judgments? It’s more likely that the people in these jobs have an inflated opinion of their own competence with regard to investing.

The MIT study found that “panic selling in normal market conditions is indeed harmful to the median retail investor, [and] freaking out in environments of sustained market decline prevents further losses and protects one’s capital”.

Now, this is tricky, because what this tells us is that in some cases you’ll be worse off if you panic sell, and in other cases you’ll be better off. What it comes down to is the market conditions at the time. But of course, this is only easy to recognise in retrospect.

In my opinion it’s never advisable to make any financial decisions when in a panic, and that goes double for selling your investments. Markets tend to recover over time and the important thing here is to be in the market when the recovery happens. 

Consider the volatility on the JSE in recent times. By mid-March 2020 lockdown measures had been introduced and the world was starting to the feel the impact of Covid-19. The FTSE/JSE all share index was down almost 29% since the beginning of the year. Panic selling at this point would have locked in these losses. By the end of the year the same index was up 7% for the year (a recovery of nearly 60% from March 2020).

If you have a financial planner taking care of your investments, chances are you’ve been told about the importance of sticking to your financial plan no matter what happens in the markets. This means sometimes doing nothing is the right thing to do. As the famous Buffett so cleverly observes: “The stock market is designed to transfer money from the active to the patient.” 

This report becomes more important to bear in mind when you consider the prevalence of DIY investing these days. Anyone with an internet connection can set up their own investment account online, but where are the checks and balances so many of us need, as made clear by this report, to make sure that we don’t fall victim to panicked decision-making?

A financial planner will give you the steady, objective viewpoint that keeps you calm when the markets are stormy. They will provide you with a well-thought-out financial strategy that charts the course for you to follow to achieve your financial objectives while playing the role of sounding board as necessary to protect you from emotional decision-making.

Given how many groups of people are overconfident in their abilities and have been shown to exhibit panic selling in the MIT research, those who think they don’t need planners are the ones who need them most. So do yourself a favour and consult a certified financial planner to ensure your finances don’t fall prey to panic.

• Bezuidenhout is a director and wealth manager at Netto Invest.