09 October 2008
Many stockholders fall into panic when faced with uncertainty, losses
Washington — When the stock market goes up, investors jump in. When the market goes down, they often flee.
But occasionally moments of outright panic occur. This feeling is now being experienced across the globe by millions of investors overwhelmed by developments — the mortgage-default crisis, the credit freeze, bank failures and the extraordinary interventions and bailouts by governments and central banks around the world.
Institutional investors and big players seek to salvage what they can and find some safe ground. The small investors, including those with retirement accounts in the stock market, are feeling helpless as they get buffeted by events beyond their control or understanding.
Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, told America.gov that, to some extent, there is very good reason for people to be concerned.
But concern tinted by stress and fear turns into panic.
Experts tell the public to stay calm, and not to panic or sell stock at a big loss. Think about the long term, they advise, and stay put if you don’t need the money right away. But this is much easier said than done.
Jared Bernstein, an economist at the Economic Policy Institute in Washington, said it is broadly accepted that psychology plays an important role in the decisions of investors.
“‘Irrational exuberance’ [excitement as the value of a stock or asset shoots up] has become all too common as the bubble inflates, invariably followed, as night follows the day, by panic,” he told America.gov. “Both are contagious.”
Financial advisers and psychologists, who have tracked market gyrations, note that panic selling is a coping mechanism that takes on a life of its own and often defies common sense.
“People don’t make rational decisions when it comes to investing their money. In fact, people are irrational,” said David Ballard, a psychologist with the American Psychological Association (APA) in Washington.
An October APA survey on stress found that nearly half of the people surveyed are concerned about meeting their family’s basic needs.
“When you are at that level [of anxiety], [the stock market slump] hits at a gut level. People react emotionally,” Ballard told America.gov.
The recent financial crisis has affected a broader population segment than ever because a larger percentage of Americans than ever has invested in financial assets, according to analysts.
“The economic belly of the United States got hit — which is the middle class,” said Scheherazade Rehman, an international business professor at George Washington University in Washington.
Investors who entered the market only in recent years have never experienced big market declines. Now that real losses are being felt across the board, they sell their stock, often without looking back or ahead.
More experienced investors do not sell on a panic impulse. David Edwards, president and portfolio manager at Heron Capital Management Inc. in New York City, said he knows the turmoil is likely to recede, just as market troubles did in the past.
“Things will be better in three months, but they look grim now,” he said.
Other observers also take the long view, urging panicked investors to keep emotions in check and maintain perspective.
In a report titled “Don’t Just Do Something, Stand There,” investment adviser Ric Edelman notes that “every one of the 13 bear markets we’ve experienced since 1945 has been followed by a tremendous bull market.”
Some economic experts do not even think that today’s market crush is something extraordinary, at least not yet.
“I wouldn’t say it’s a panic,” Robert Savickas, a finance professor at George Washington University, told America.gov. He called the current selling frenzy just an “emotional swing.”
However, “if these emotions backfire into the rest of the economy, I would be concerned,” Savickas said.
One thing is certain, observers say: Investors will be cautious in the near future.
Naroff said it will take some time before people step in and actually buy stocks again for the right reasons.
In the meantime, he said, panicked sellers are dominating the market.
“I think it is a situation where the panic aspect is fear, fear that you are going to lose all your money. You don’t care what it costs,” he said. “You just want out.”