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Be careful if you are a man over 45, and I think you know about investing

If you think you are a man, over 45, married, have a lot of dependents, or have good investment knowledge, the recent weaknesses in the stock market can be especially dangerous to your wealth. I have.

This is because investors in these demographic categories are more likely to react by “panic selling” in astonishment at the decline of the market. That way, you’re more likely not to return to stock until the stock market is much higher than it was at the time of sale. This will result in a loss of purchase and possession.

In fact, according to new research, it may never come back. Almost one-third of investors who “panic sell” give up their stocks altogether and never re-enter the market. Therefore, they lose the long-term potential of stocks.

It’s important to check this new survey at all times, especially now, especially given the recent losses in the stock market. S & P 500
SPX,
-1.45%

The Nasdaq Composite fell 22%, while it fell 16% from late March.
COMP,
-2.17%
..
Both declines are unusually severe in such a short period of time, causing many and nearly retirees to panic.

read: You have just retired and the target day fund has plummeted. what do you do now?

This new study appears in the Winter 2022 issue. Journal of Financial Data Science.. Given the right “When do investors freak out?Machine learning forecast for panic salesThis study was carried out by many researchers at MIT’s Institute for Financial Engineering. A panic sale occurs when an investor “intentionally and suddenly sells a significant portion of a risky asset,” researchers say, “a 90% reduction in household equity assets in a month. And 50% or more of them are due to trading. “

The study gave authors access to a dataset consisting of over 650,000 individual intermediary accounts between 2003 and 2015. The dataset contains many substantive details of the account owner, and researchers have various demographic variables regarding the frequency of panic sales. They found that the following variables correlated with such frequency:

  • Year. People over the age of 45 are “more likely to panic … young investors are less likely to panic significantly.”

  • marital status. “Investors who are married or divorced are more likely to be surprised than other groups.”

  • sex. “Men can be slightly higher than women … panic selling during periods of high financial stress.”

  • Number of words. “Investors without dependents are least likely to panic.”

  • Self-reported investment experience.. “The potential for panic sales and freakouts is most noticeable when investors self-declare a good or good investment experience.”

  • Self-reported investment knowledge.. “Investors who describe their investment knowledge as a good or good panic, as well as their investment experience, are more likely to be offered for sale or surprised.”

Why do these demographic characteristics correlate with increasing trends in panic sales? Correlation is not causal, so it’s difficult to answer. Researchers do not try to answer.

But undoubtedly, many different factors interact to cause these results. Presumably, the tendency to panic psychologically must play a major role. This trend is more pronounced among older investors, and therefore the time it takes for the portfolio to retire to recover from the bear market is likely to be short. This tendency can be stronger among other financial supporters as well, explaining why marriage status and the number of dependents also correlate with panic selling.

And given the low odds we all face when trying to time the stock market, there is no doubt that overconfidence is a factor. This explains why self-reported investment experience and knowledge correlates with panic selling. Past behavioral studies have also shown that men are more likely to be overconfident, which explains their correlation with gender.

However, regardless of the cause, the researcher’s results are powerful enough that great care must be taken. Researchers have used artificial intelligence to build a model that predicts whether investors will engage in panic sales and find that their model has an impressive success rate. This reinforces the conclusion that if you belong to one of the demographic categories related to the high frequency of panic selling, you need to take special care not to be surprised and panic selling in the bear market. increase.

However, anyone who does not belong to any of these particular demographic categories should not be satisfied. Even if some of us are more likely to do so than others, we can all panic.

The problem is panic, not selling

It’s worth emphasizing that the reason for not selling panic is that selling is by no means a good idea. The problem is that you shouldn’t rush to do so from a panic. It’s good for you if you sell according to a pre-determined financial plan. Your roadmap definitely shows when you should return, and your challenge is not to guess the roadmap second, but to follow it instead.

What you definitely want to avoid is to be in the middle of the bear market as it is now, without a roadmap. It’s hard for your emotions to resist, so you’ll panic and be tempted to sell at any cost. In many cases, you will eventually regret the portfolio decision you made.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat rate to be audited.He can reach at mark@hulbertratings.com..

Be careful if you are a man over 45, and I think you know about investing

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