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- The market chaos from Trump's tariff policies led many investors to sell and run to cash.
- As the stock market recovers its losses, those who sold are missing out on the rally.
- Panic selling is a painful learning experience, but it can happen to the best investors.
Selling your stocks and running to cash might have seemed like a smart move in the heat of the moment as tariffs rocked the market. But President Donald Trump, inadvertently channeling his "Art of the Deal" playbook, taught investors a tough — not to mention, costly — lesson: never panic-sell.
In recent months, the stock market lurched through a volatile series of sharp plunges and fleeting recoveries. The S&P 500 briefly dipped into bear market territory after a 20% drawdown from all-time highs in February.
Fast-forward and the market has clawed back its losses to be in the green for the year. That means Trump's Truth Social fans who followed his "THIS IS A GREAT TIME TO BUY!!!" advice are looking pretty smug, while panic sellers are likely feeling pretty regretful.
Panic selling is more likely than you think
Panic selling isn't always a rookie mistake.
And when people do hold on to their assets, it's not exactly a popular decision in the moment. Brian Belski, BMO's chief investment officer, stayed steadfast through the market noise but received a hefty dose of criticism for doing so.
"We took a lot of heat in the media, a lot of heat internally, and a lot of heat from our clients," Belski said on a May 13 episode of the "Bloomberg Surveillance" podcast.
"People are making binary decisions based on emotion without analysis. And the analysis said that the markets were not going to be as broken as everybody thought. And I think everyone was, once again, jumping to conclusions," Belski added.
The math behind panic selling
"Market timing is futile and staying invested is paramount," Jacob Manoukian, JPMorgan Private Bank's US head of investment strategy, wrote in a recent note. "Over the last 20 years, seven of the 10 best days in markets occurred within 15 days of the 10 worst days."
Put simply, some of the best-performing stock market days come after the biggest declines. If you pull your funds out of the market during a drawdown, you not only sell your assets at a loss, but you also miss out on the recoveries that happen afterward.
What now?
"Don't panic sell" seems like basic advice, yet every time a market drawdown occurs, investors still run for the hills. Since 1954, a correction of 20% or more has occurred about once every six years, according to Capital Group. So why haven't retail and institutional investors alike learned their lesson?
Investors get caught up in their emotions more often than they'd like, according to Katie Klingensmith, the chief investment strategist at Edelman Financial Engines. No two market sell-offs are alike, either. The policy-induced market sell-off of the last few months looks quite different from the pandemic crash of 2020. And sometimes, newer investors just haven't lived through the jarring reality of seeing their holdings plunge 20%.
What's the antidote to panic selling? "You buy," Belski said, "and you try not to outsmart yourself."
It's important to stay invested, and dollar-cost averaging by buying back into the market at regular intervals can help smooth out volatility.
If you found yourself panic selling, that also might be a sign to reassess your risk tolerance, Klingensmith recommends. Some people prefer to have a lower-risk strategy than needed to make sure their investment is aligned with them both emotionally and practically. Doing so can give investors the peace of mind to prevent a behavioral pitfall.