What Type of Investor is Most Likely to Panic Sell During a Downturn?
September 27, 2021
Whenever there is turmoil in the stock market, many investors’ first impulse is to sell. Though research has shown consistently that attempts to time the market result in worse returns, when the market dips, some investors cannot stop themselves from panic selling, and according to a new research paper, some types of investors are more likely to panic sell.
When the market drops, men, investors who are over the age of 45, investors who are married or have dependents, and investors who describe themselves as having “excellent investment experience” are more prone to panic selling, according to researchers at MIT. They also found that panic selling is far more common for investors with a portfolio worth less than $20,000. The researchers made no attempt to explain why some kinds of investors would be more likely to panic sell, noting that every individual has unique life factors that impact their financial decisions.
While they found that panic selling is relatively uncommon, with just about 9% of households doing so during that period, it is three times as common during large market movements, such as the 2008 financial crisis.
The researchers also found that when investors do panic sell, nearly one-third never return to reinvest. Of those who do reenter the market, 58.5% do so within six months.
Most importantly, the research found that there were very few instances where panic selling proved to be an effective stop-loss method, and that the average investor earns a negative or zero return after he or she panic sells.