Net Gains: Lessons From the Latest Panic
If you dumped stocks in January, you're probably regretting it now.
May 7, 2008 — -- On Jan. 22, panic was in the air.
For three weeks, stocks had been in free fall. The day before, while the U.S. market was closed, foreign stock markets plunged. Worry gripped investors.
The Dow Jones Industrial Average fell 128 points that day, capping off a nearly 10 percent decline since the beginning of the year. There appeared to be no limit to how far stock prices might fall.
How long would it be before stock prices lost another 10 percent, maybe even 20 percent? One day? One week? One month?
Many investors didn't want to stick around to find out.
Now, less than five months later, imagine you succumbed to the panic that day and dumped all your stock holdings in favor of a bank CD or money-market fund. What would have happened?
There's a good chance you'd be feeling some regret right now.
For a day or two, you would have felt good about your rush to safety and maybe even a little smug as the Dow fell even further in March, reaching its low point for the year — 11,740 on March 10.
Ultimately, however, what would have happened is by selling you would have locked in losses and missed out on a rebound. From Jan. 22 through Monday, the Dow rose 8.3 percent. In the meantime, a bank CD might have earned at best 1 percent during that same period.
Consider that lesson in why it's never wise to fall victim to market panic.
Sooner or later such a decision will come back to bite you. The only question is how long before you realize it.
Like nearly every other financial planner or investment adviser in America, on Jan. 22 I recommended investors resist rash decisions to sell during what certainly was a turbulent spell in the stock market.
"Sell out of panic, and there's a good chance you will regret it later on," I told an ABCNEWS.com reporter that day.
I had no idea at the time how long the market downturn would last or when a rebound might occur. At the time, I certainly thought there was good reason for investors to feel pessimistic given the state of the economy, including the depressed housing market and a credit market in near meltdown.
