Don’t Follow Panicked Stock Investors over a Cliff «

Don’t Follow Panicked Stock Investors over a Cliff

When should a stock investor follow the herd and when should she head the other direction?
You can find arguments on both sides of this question.

One argument says, if everyone else is selling, you should be buying – and if they are buying, you should be selling.

The logic of this is that a sell off will drive down prices and possibly create bargains in good stocks.

Hot Stocks
A fit of over-exuberance that has investors on a buying spree will run up the price of stocks, even mediocre ones and may present a good opportunity to unload some for a profit.
Of course, it’s seldom quite that simple.

Following the herd is usually a bad idea because by the time the herd (of other investors) gets excited about a stock or group of stocks, it’s usually over bought and over priced.

When the economy is troubled, stocks take a beating because investors look for other opportunities, such as fixed income instruments.

Stay with Stocks
Yet, study after study has shown that investors that ride out market down turns come out better when the market rebounds.
The reason is that investors who flee the market do so with stock prices on the way down. They are following each other off a cliff and driving prices lower as they go.

When the market rebounds, they come back in as prices are rising.

That’s right, they sold low and bought high.

Investors who wait out the market don’t have to worry about timing their exit and re-entry.

False Starts
The market often makes several false starts and stops both on the way down and on the way back up.
Investors who think they can time their exit and entry are lucky if they do it correctly.

Your portfolio is not something you should leave to chance.


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