DO NOT SELL INTO A FREE FALL: Reasons Why you Shouldn't Panic and Sell your Stocks

“If you sell at the bottom, you will miss out on an eventual recovery. If you really want to get out, wait for a bounce and then sell some of your stock holdings. Don't sell into a freefall.”

For new investors, I suggest to be invested in the market for the long term – ride out waves, be brave, use episodes of panic selling to buy more stocks.

Remember that in the stock market, one thing distinguishes the professionals from the amateurs: The professionals panic first. Here’s an example. On the days you see markets take a huge hit, (i.e. when the market falls several hundred points) – as it did last week - is not because individual investors decided to ditch their stocks. If not individuals, then who dropped the ball? It’s none other than the fund managers of pension funds, mutual funds and hedge funds. Individuals are generally more focused on the long-term.

Before you panic and sell your stocks, ask yourself these two questions:

1. Why do I own these funds? (i.e. owning an emerging-markets fund or gold fund)

2. Does it still seem like a good idea now?

Now let’s address two economic worries.

Worry # 1: Worried about deflation (a period of falling prices, i.e. the Great Depression)? Then invest in treasury securities. These are resistant to being defaulted, and the interest payments can buy more goods and services as prices fall.

Worry #2: Worried about hyperinflation ( a period when paper money becomes virtually worthless)? Then invest in gold or inflation-adjusted Treasury securities. Although neither of these investments will make you rich quick, it will stop you from having a panic attack. Neither investment will make you rich.

Now let’s look at behavior when news about your investments hit the news. When stock prices fall, people panic and sell when they shouldn’t. When stocks skyrocket, like that of gold stocks, people buy. It’s not surprising that investors chase performance.

Let’s look at the evidence. In the late 1990s and early 2000s, tech stocks illustrated strong gains. People bought at high prices prior to the dot-com bubble burst in March 2000. Billions were lost. History repeats itself in 2006 prices of homes were rising and shares in this were selling at the rate of cancer in its late stages. The housing bubble popped in 2007, sending billion (yet again) down the drain.

Conclusion: Hold your ground. Do not sell when you’re in the trenches. You either buy or hold.