The Most Common Mistakes Investors Make in a Market Sell-Off and What to Do Instead

As uniquely troubling as the current market sell-off has been, at least one feature feels similar to me: Convincing investors to avoid the grave psychological mistakes that come from short-term thinking during a market sell-off.

These are some of the most common mistakes investors typically make, and my suggestions for what to do instead.

1. Investors Panic Sell. It can be painful to see your investment portfolio or the 401(k) plan that you've been growing for years take a sudden dive. The urge to stop the bleeding can be overwhelming – salvage what you can and wait for the dust to settle. Ironically, this can be the most dangerous thing to do.

Selling into a panicking market ensures that you lock in your losses, and if you wait too long to get back in, you may never recover.

Instead, take the long view and don't panic sell. Remember the Warren Buffet quote, "Be fearful when others are greedy, and greedy when others are fearful." If you don't need liquidity right away and have a diversified and well-researched portfolio, realize that market downturns are temporary. The market may sometimes feel like it may never recover, but market history shows that rebounds can happen quickly.

2. Investors go to cash and stay there. Staying in cash is the worst mistake investors make after panic selling. The strong rebound in stock prices since their March 23rd, 2020 lows is an excellent example of how selling out can cost you when the market reverses direction.

Instead, do this: If you have more cash than your long-term goals call for because you sold during the market sell-off or for any other reason, look to wait for the market to stabilize and look for opportunities to buy growing businesses with steady cashflows. Market downturns are great buying opportunities.

3. Investors are overconfident and make poor choices. Many people overestimate their ability to pick the bottom based on how far a stock is from prior highs; this is called "anchoring" the value of a beaten-down company by the previous higher price when it still has a lot further to fall.

Instead, do this: In times of market volatility, you don't have to figure out what to do next on your own. Instead, find a trusted Financial Advisor to go over your portfolio with you and develop a plan to proceed based on your goals, risk tolerance, and time horizon.

4. Investors dig a deeper hole, trying to make up for losses. It is common for investors to avoid selling an investment at a loss. This way of thinking can cause investors to hang onto losers too long because they believe those stocks will rise again and sell winners too early because they worry those stocks will decline, known in behavioral finance as the "disposition effect." Often, investors would be better off selling poor-performing stocks and holding onto winning stocks because they are better positioned for the current market environment.

Instead, take advantage of current market opportunities, which often run opposite those instincts. For example, if paper losses arise in a taxable investment account, "harvesting" them by selling losing positions can improve tax efficiency. Also, many investors are better off converting part of their retirement savings from a traditional IRA to a Roth IRA. But, of course, since there are tax consequences, doing a conversion when stock values are depressed could be a good move.

5. Investors forget to rebalance. A portfolio's asset allocation to equities decreases substantially as stocks sell-off and bonds rally during a significant market sell-off. Often shocked by the move, investors may forget to rebalance their portfolios back into equities and may lengthen the portfolio's time to recoup from a market drawdown. This is when investors need to be greedy when others are fearful.

Instead, do this: Have a rebalancing plan and stick to it based on current market opportunities. Look towards the future and plan accordingly. Portfolio rebalancing boosts risk-adjusted returns, reducing portfolio sensitivity to the timing of up and down markets.

Investment losses can be painful, but if investors can stay focused on their goals rather than obsessing over temporary losses, they will be better off in the long run.

Find an Advisor

Investment Disclosures

​This material is not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

The views expressed are the views of Infinitus Wealth Management, LLC. These views are subject to change at any time and may not represent the views of all portfolio management teams, Wealth Advisors, or other Investment Professionals. These views should not be interpreted as a guarantee of the future performance of the markets, any security, or any funds managed by Infinitus Wealth Management, LLC. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Investment Advice will be given to individual clients based on risk tolerance, time horizon, investment objectives, and other considerations.

Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Local, regional, or global events such as environmental or natural disasters, war, terrorism, pandemics, outbreaks of infectious diseases, and similar public health threats, recessions, or other events could have a significant impact on investments. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.

We value the trust our clients have placed in us and are committed to the responsible management, use, and protection of their personal information. Please take a moment to review this Privacy Notice to learn how we protect your information and use it to service your account(s)