10 Reasons Not to Panic Sell Your Worst-Performing Holdings

It's been a rough year for investors. Inflation, rising interest rates, supply chain challenges, and the war in Ukraine have all weighed on the market, pushing major indexes down for the year.

If you're an investor in high-growth stocks, you've probably taken a big hit as many of the names that soared during the early stages of the pandemic have plunged over the past year. However, you may want to think twice before you throw away your worst-performing stocks.

Here are 10 reasons to think before you sell your dogs.

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The volatility over the past year is a reminder of how fast market sentiment can change. The Nasdaq peaked in November and briefly entered a bear market -- defined as a decline of 20% or more from a recent peak -- in March. Cathie Wood's ARK Innovation ETF, a good proxy for high-growth stocks, has fallen even further, down roughly 50% from its peak.

However, this situation could reverse quickly. In late 2018, stocks briefly pulled back, with the Nasdaq slipping into a bear market on concerns about rising interest rates, but that momentum quickly shifted. In the first few months of 2019, the tech-focused index had recouped those losses.

Such a reversal could happen, and it's easy to overestimate the durability of the current market environment.

ALSO READ: Stock Market Volatility Explained

If you're thinking of hastily selling your losers, you're essentially trying to time the market, or selling because you think they're likely to go lower in the short term.

The problem with market timing is that it's virtually impossible to do consistently. You might be right and the stock could go lower, but trying to time the market repeatedly is much more difficult than holding stocks for the long term.

If you're selling because you're trying to guess the direction of the market, you're probably making a mistake.

Of all of Warren Buffett's quotable lines, perhaps the best known is, "Be fearful when others are greedy, and be greedy when others are fearful."

It's counterintuitive in some ways, but in investing it's often a mistake to make decisions based on emotions. If you are feeling fearful because stocks are falling, it's likely that other investors are feeling the same way.

Ironically, those times when the market is down are often some of the best times to buy as you can take advantage of stocks trading at a discount based on fear.

ALSO READ: What's in Warren Buffett's Portfolio?

Part of the reason it's common to want to panic sell your losers is that, behaviorally speaking, losses hurt twice as much as gains feel good.

This is one of the most powerful forces in behavioral economics, or the branch of psychology that focuses on how people deal with money or, more generally, scarce resources.

Because the impact of losses is greater than that of gains, investors have a tendency to want to diminish their risk to avoid losses, a behavior known as loss aversion.

While losses may have an outsize impact on your psyche, the financial impact of a loss is equal to a gain of the same size. It's also important to remember that selling a winner early can be much more costly than holding onto a loser.

Many of the best-performing stocks in recent history have lost most of their value at one point or another. Amazon plunged 90% in the dot-com bust but has gone on to return 100,000% to early investors.

Netflix stock tumbled in 2011 during the Qwikster debacle when it split its DVD-by-mail and streaming businesses. Though many regarded it as a broken business after the split, Netflix had gained than 4,000% over the past decade before its recent pullback.

It's worth remembering that a drawdown in and of itself is not a reason to sell a stock. In fact, many of these sell-offs have scared away investors who could have made big returns.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

For most long-term investors, especially growth stock investors, the biggest risk in selling a stock is that you sell a winner early. For instance, if you had sold Tesla before the pandemic, you would have missed out on a gain of more than 10x.

On the other hand, if you sell a loser before it falls even more, you'll save some money, but what makes the real difference in your portfolio is your winners.

Before you sell you a stock, ask yourself if you still think it has multibagger potential. If it does, you're probably better off holding it.

ALSO READ: When to Sell Stocks

It's a good idea to keep a checklist or a notebook of your investments and to write down your investment thesis for each stock.

If you know why you invested in the company, then you can reassess your decision according to that thesis. Over the past few months, a number of stocks have sold off for reasons that are only due to market sentiment. However, if you own stocks whose business prospects have fundamentally changed, like Peloton or Stitch Fix, you may want to revisit your thesis and see if you still believe in those stocks.

Panic selling implies that you're selling purely out of fear. You've seen your stock fall below its cost basis and you're afraid it will keep falling.

It's a good time to remember that stocks fall faster than they go up, but they go up for longer than they go down. Through its history, the stock market has returned an annual average of around 9%, including dividends reinvested.

If individual stocks are too volatile for you, you may want to consider investing in an index fund, and know that history is on your side.

ALSO READ: Investment Strategies for the Long Term

If checking your portfolio every day is giving you a whiplash, maybe just take a break and wait for the volatility to shake itself out.

Warren Buffett has said he would be comfortable with the market only being open a few days a year, and long-term investors should take a similar approach.

The best way to benefit from the growth of the stock market is to take advantage of the benefits of compounding. To do that, you have to stay invested for the long term.

If you're planning to sell your stocks, ask yourself if you're selling because you need the money soon or if it's because you don't think the stock is a good investment anymore.

A retiree is naturally going to have a different time horizon from a young adult. If you need the money soon, that would be a good reason for selling in a challenging market like the current one. Alternatively, if you're saving for a retirement that's 10, 20, or 30 years away, you'll want to avoid panic selling in down markets as you could sell the next big winner. On the other hand, if you need the money soon, you may want to take a more conservative approach, or switch to cash.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

It's tough to watch your portfolio shrink, and the decline in growth stocks over the past year may be as bad as any since the dot-com bust 20 years ago.

Still, the sell-off is no reason to panic. Volatility and risk are the price of admission in the stock market, and those sell-offs can be healthy as they bring down lofty valuations and keep investors from getting too greedy. After all, if stocks went up 20% every year in lockstep, everybody would put their money in the market.

If you're thinking about selling, do your homework first, and remember that over the long term, stocks have historically returned 9% a year.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns ARK Innovation ETF, Amazon, Netflix, and Stitch Fix. The Motley Fool owns and recommends Amazon, Netflix, Peloton Interactive, Stitch Fix, and Tesla. The Motley Fool has a disclosure policy.