Is It Too Late to Sell?

If you expected the bailout to bail you out, you've gotten the disappointment of a lifetime. After what seems like constant drops in the market, even die-hard stock investors want to cry uncle.

The S&P 500 has dropped 18% in just seven trading sessions. The Dow sliced through 10,000 as though it wasn't even there, and has lost more than 15%. The Nasdaq? Off more than 20%. In just a week and a half.

If you didn't think stocks were risky before, you certainly know better now. Is it time to get off the ride before things get even worse?

What history really says
You've already heard all the basic talk about how historically, big market plunges are a great time to buy. That's easy to say looking back, but a lot harder to believe when you're in the middle of a plunge. So let's take a closer look at some similar periods in the past 20 years or so when stocks fell sharply:

Source: Yahoo! Finance.

Note that in terms of short-term drops, the past two weeks have been extraordinary -- only the 1987 crash exceeds the speed of the declines we've seen. Also, it's reassuring to see that after big drops, the market tended to do reasonably well in the near future. That even includes drops early in the bear market of 2000-02, when those short-term gains would later give way to further declines before hitting bottom in late 2002.

Digging deeper
So history says buying stocks after a huge drop has usually been a smart move. But which stocks should you buy? Are the companies that have gotten beaten down the most the same ones that will recover the most? Or should you look elsewhere?

To answer those questions, let's look more closely at the latest three recoveries from big drops. Since technology was the focus of the 2000-02 bear market, let's look at how much some big-name tech stocks recovered after those drops, compared to stocks in other sectors:

Source: Yahoo! Finance.

In general, there's no obvious difference in how high-quality tech stocks did versus a sampling of blue chips from other sectors. In late 2001, after the decline following 9/11 that affected stocks across the board, stocks generally rebounded fairly evenly. Similarly, most shares bounced back after the July 2002 swoon. Only in early 2000 was there a distinction drawn between tech stocks and more defensive sectors, although even then, not every stock participated in the recovery.

Should you sell anything?
If it were still early in this bear market, it might not be too late to sell the hardest-hit stocks -- in this case, financials -- despite substantial drops. You might reasonably decide that the worst is yet to come, and so taking big losses is still better than losing even more by hanging on. Just as selling tech stocks in early 2000 would have saved you some money, selling financials after their initial drops in 2007 and earlier this year could have prevented a lot of damage to your portfolio.

Now, though, the bear market has been around a lot longer. Shares have taken hits across the board, regardless of whether they're financial stocks or not. The situation looks a lot more like 2001 or 2002 than 2000 -- and so it's likely nearly everything will recover when the market rebounds.

So if you've stuck it out this long, it's far too late to sell. Even if the bear market stays with us in the years to come, the odds are good that selling right now after a panic-driven drop will prove to have been a huge mistake.

More on panic in the markets:

• Saving your retirement from the fall.
• Cramer joins the crowd of sellers.
• How you can panic-proof your portfolio in five minutes.