Feeling panicky? Here are four reasons not to overreact

When the market indexes plunge and your portfolio shrinks, it's natural to think about bailing out of your investments, particularly stocks. But before you head for the exits, consider four reasons why sticking with your investment plan, and resisting the temptation to sell, may be your smartest move.

Reason 1: Market timing is a losing strategy.

You may be thinking you should sell now and get back into stocks later when the market "settles down" and the economy starts to recover. But this approach—called market timing—can lead to disappointing returns. In effect, it puts you at risk of selling low and buying high.

If you do try to time the market, how are you going to know for sure what's the "right" time to get in and out? There is never an announcement that a declining market has started or ended. The direction of stocks can change very quickly; market rallies often occur suddenly and over very short periods. If you happen to be out of the market during those times, you could miss all or most of the gains for that year. This is sometimes called "out-of-market" risk, and it's a risk you should consider when making decisions about your investments.

"Market timing is extremely difficult," said Donald G. Bennyhoff, a senior investment analyst with Vanguard Investment Strategy Group. "To profit from market timing, you have to be able to get out before the low and be able to get back in before the market moves decidedly higher. It's impractical. It may sound good in theory, but market timing mostly fails in practice."

 

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