At what point, if a stock or the market is tanking, should you panic and think about selling? Well, during stock market downswings, many investors get anxious, wondering whether they should follow the crowd and bail out on some of their investments. This is often the worst time to sell, yet it's when many people do. Here are some pointers on the fine art of panicking.
People tend to panic:
- When the market tanks.
- When a stock they own tanks.
- When people around them are panicking.
None of these are particularly good reasons for panicking.
Here's when you might have cause for concern, though:
- When you don't know why you own the stocks you own. If you have no clue why you ever bought shares of Bedmobile Inc. (ticker: VROOM), you'll have a lot of trouble determining when it's the right time to sell. Did VROOM's shares just take a nosedive? It might be due to some fleeting market misunderstanding, in which case you should hang on. Or it might be due to some serious trouble at the firm. An informed investor should have a good handle on her investments.
- When you don't understand the long-term upward trend of the market. From decade to decade, stocks in great companies, and the market as a whole, both tend to rise in value. To keep your blood pressure down during market slumps, remind yourself of this.
- When you have a short time horizon. If your moolah is invested in stocks for just a few months, or even just a year or two, then go ahead and begin hyperventilating right now. Anything can happen in the short term. Even stocks in wonderful companies can temporarily freefall. Any money you expect to need within the next five (but not 10 or more) years should be out of stocks and perhaps in CDs or money market funds.
- When you haven't learned that it's the percentage of the market drop that counts, not the points. A 100-point drop was a big deal when the Dow was at 1,000, because it represented a 10% drop. But, when the Dow is at 10,000, 100 points is just 1%.
Well-informed Fools should rarely panic. Expect occasional market slumps and surges. Read up on investing. The more you learn, the less you'll panic.
Here are some informative Fool articles to make you savvier about the market:
- Wall Street's Worst-Kept Secret
- Searching for 40,000% Returns
- Three Cheers for a Bumpy Market!
- Not All Dividends Are Created Equal
To learn more about investing Foolishly, visit our Fool's School and our Investing Basics area. Or check out some of our inexpensive and well-regarded online how-to guides (which feature money-back guarantees). You can also learn all about brokerages and find one that's right for you in our Broker Center.