What To Do in a Sell-Off
There’s no worse feeling than checking your portfolio and discovering the market is in the midst of a panicked sell-off. Watching a stock (or many stocks) you own drop further and further with no discernible end in sight can be a heart-wrenching experience. But, like all things, sell-offs are only temporary.
While broad market selling can be disconcerting for any investor, successful investors understand how to navigate the rapids and avoid making costly mistakes. Your first reaction might be to sell your holdings as soon as possible to avoid taking even greater losses, but history has demonstrated that that might be the worst possible decision you can make at that time. While selling a stock might be necessary, there are better methods for dealing with turbulent markets.
Noted CNBC personality Jim Cramer has a saying about volatile markets, “No one ever made a dime by panicking.” Other investors have a similar take on the subject, like Warren Buffett, who says when everyone else is selling, that’s when you want to be buying. But you don’t have to be a famed investor in order to take advantage of sell-offs – anyone can learn how to handle these crises and come out the other end with minimal losses.
The first thing you need to do when markets are in a free-fall is figure out why the sell-off is happening. You can’t make an educated decision about what to buy or sell if you don’t know why the markets are behaving erratically. Often, the markets are falling for reasons that don’t fundamentally affect the stocks you hold in your portfolio.
Markets often undergo regular corrections that aren’t tied to a bigger problem other than the fact that stocks are overheated. Other times, computerized trading causes temporary “flash crashes,” which don’t mean the stocks you hold are flawed. Even when a macroeconomic event causes the market to reverse course, not every sector of the economy will be impacted. For example, if the global economy begins to slow down and stocks began to retreat, other sectors like consumer discretionary, pharmaceuticals and utilities will actually outperform.
Many times, when a sell-off happens, it only makes fundamentally sound stocks cheaper for investors who know buying during a panic can be an opportunity. Investors who stick to their long term strategies will be able to weather the storm and turn panic into profit.
Understanding that corrections are a natural part of the stock market is essential in order to stay the course. The most important thing investors need to takeaway from a sell-off is that bear markets are only temporary, no matter how aggressive they are. Staying calm and making decisions based on fundamental analysis, not technical selling activity, is the best way to ensure you keep stocks that shouldn’t be sold and eliminate only those stocks that are fundamentally flawed.