If you have been paying any attention to the stock market recently, you may have noticed that it has been on a wild ride the first part of this year. According to a new study, if you meet any of the above criteria, you might not only be more likely to be a “panic seller”, you may be even more likely to not get into investing altogether. By then, it might be too late.
From MarketWatch, there was a new study that appeared in the Winter 2022 issue of the Journal of Financial Data Science that came to the above conclusions. The study had been conducted by numerous researchers at MIT’s Laboratory for Financial Engineering. When it comes to panic selling, an investor “intentionally sells off a substantial portion of his risky assets abruptly,” which the researchers define as “a decline of 90% of a household’s equity assets over one month, of which 50% or more is due to trades.”
As a part of the study, the authors had been given data set access which was made up of more than 650,000 individual brokerage accounts between 2003 and 2015. These data sets had a lot of detailed information for many of the owners of the accounts. This allowed the researchers a better glimpse into the correlation between the frequency of panic selling along with a set of demographic variables. Here are some of their findings:
- Age. People older than 45 have a “heighten tendency to make panic sales… Younger investors are less likely to make panic sales by a wide margin.”
- Marital status. “Investors who are married or divorced are more likely than other groups to freak out.”
- Gender. “Males are slightly more likely than females to… panic sell during periods of high financial stress.”
- Number of dependents. “Investors with no dependents are least likely to panic sell.”
- Self-declared investing experience. “The likelihood of panic sales and freak-outs is most pronounced when the investor has self-declared good or excellent investing experience.”
- Self-declared investing knowledge. “Similar to investing experience, we find that investors who describe their investment knowledge as good or excellent panic sell or freak out in higher proportions.”
At the end of the day though, as Mark Hulbert with MarketWatch points out, correlation is not causation. The researchers don’t attempt an answer as to why the above seemed to frequently be the case, but Hulbert has some good suspicions.
If I were to speculate, I’d bet that a psychological tendency to panic plays a big role. It seems plausible that this tendency is more pronounced among investors who are older and therefore have less time before retirement for their portfolios to recover from a bear market. This tendency also could be stronger among those who have others besides themselves to support financially, explaining why marital status and number of dependents also are correlated with panic selling.
I’d also bet that overconfidence plays a role, given the poor odds that all of us face when trying to time the stock market. This would explain why self-declared investment experience and knowledge are correlated with panic selling. It would also explain the correlation with gender, as past behavioral studies have found that men are predisposed toward overconfidence.
Like Hulbert mentions though, regardless of the study, we are all capable of panicking when it comes to our investing tendencies, even if the above study shows that some may be more likely than others to do so.
That’s not to say that one shouldn’t sell, and at the end of the day, be sure to work with your respective financial professional on your road map at the best options for you.
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