Panicky Investors Buy High, Sell Low

Investors not outright paralyzed by fear already should be justifiably fed up after Friday's latest global market rout. An overwhelming impulse to get out, cash out, hide out; it's all-too human. That's why it's a grave error. Emotional investors are poor investors. They buy high and sell low. Today's market swoon is just the latest perfect trap to lock in losses. Don't do it.

We've said it again and again, but it bears (pardon the phrase) repeating: Don't panic. Don't sell into the drop. Remember that exactly two Fridays ago the Dow Jones Industrial Average collapsed 18% in a week. Retail investors pulled tens of billions of dollars out of mutual funds. Come Monday the market rallied nearly 12%.

The lesson: If you can't be greedy when others are fearful, that's fine. But please don't be among the fearful.

"The absolutely worst thing you can do right now is to try to time the market," says Shashin Shah, president of SGS Wealth Management, a Dallas financial-planning and investment-management firm. "Just as markets can have bubbles to the upside, they can also have bubbles to the downside."

Jittery investors looking to bail on the market need to maintain perspective and stick to long-term goals, Shah says. Ask yourself: In two, three, five years' time, do you expect the market to be higher than it is today, or lower? After all, when there's a relentless stream of bad news it always seems like the crisis is never going to end. But that's when it's most important to remember that, regrettably, we have been here before.

"People who have the time and can afford to have money in the market need to ask themselves: Is the world as we know it coming to an end?" Shah says. "Or are we going to recover from this, as we have in 1987, after the tech bubble, after 9-11?"

If you don't have the time, if two to five years is simply too long to wait because you have cash needs now, well, the worst time to sell is on a day when the market is plunging. A disciplined, measured approach to cashing out is just as important as when buying in, like dollar-cost-averaging, only in reverse.

Finally, there's the question of where to stick that cash as you liquidate your holdings. It's not a simple matter. Gold, the traditional safe have during times of economic crisis, isn't glittering. Oil is collapsing despite OPEC production cuts. Sure, your cash will be safe in FDIC-insured certificates of deposit or savings accounts or Treasurys, but short-term rates are so low it's hard to generate a positive return against inflation. There's a lot to like in municipal bonds. Yields are staggering right now and careful investors can find great deals. But allocating 100% to munis isn't an investing strategy either. Don't commit a second cardinal sin by failing to diversify.

The bottom line? Never make a drastic move when everything is going to hell. If you must start cashing out, make a plan. Panic selling isn't an investment strategy. It's just a good way to make a bad situation even worse.