The Price of Panic: What Selling Stocks in a Downturn Really Costs You (And Why Staying Invested Wins)

The sky is falling!

At least it kind of feels that way if you are paying attention to the stock market and watching the value of your portfolio plummet. The S&P 500 index has lost over 17% since its record close on February 19, 2025 at $6144.15 to the April 7th close at $5074.08. That is a quite a dip in less than two months!

In times like these, it is very tempting to get out before things get worse and before you lose more money. But before you start clicking “sell” on all your stocks, I want to show you how that decision could impact you.

Let's look at our last big market downturn:

In January 2022, the stock market was riding a new all-time high--but things were brewing beneath the surface that were cause of concern. The first was rising inflation. It seemed the government stimulus dollars and the Covid “social distancing” over the previous couple of years was driving an itch in the population to start spending money. At the same time, supply chains had not recovered from the pandemic slowdowns and product availability was still low. This was driving inflation to highs that we hadn’t seen in decades.

Then, to make matters worse, Russia attacked Ukraine, further disrupting supply chains and causing concern for global peace. The markets reacted and resulted in a rapid downturn that didn’t hit the bottom until October of that same year. From peak to floor, the S&P 500 lost 25.4% and took just over 2 years to fully recover.

When the market falls like that, it is human nature to want to bail, sell your higher risk investments like stocks, and put it in something “safe” like cash, or maybe bonds. Just until the market recovers, though!

So, what usually happens? As the market drops, people start getting antsy. At various degrees of decline, investors have had enough of the losing and start the selling. The further it falls, the more tempting it is to sell. After you sell, you feel so much better. You stopped the bleeding!

But then what happens next? Well, eventually the market turns around and starts climbing again. In fact, frequently the greatest days of gain come shortly after a major loss. But you, the safe investor, don’t want to jump back in too early and then just see things fall again. So, you wait. And the market climbs some more.

Dang it! You missed that jump. But you aren’t going to get in now because that would be buying high, and you know not to do that. You’ll wait until it drops back to where you sold it before (anchoring bias).

But it doesn’t drop again. It keeps climbing! And climbing! Now you have a different kind of fear--not of watching the value of your stocks drop but a fear of missing out (FOMO) on the recovery. All your colleagues keep talking about how well their stocks are doing. You’ve got to get back in before it's too late! Yes, you are paying more for the same stocks, but you can’t stand to see things keep climbing and not take advantage.

What did you just do? You sold low and bought high—all because of bad investor behavior and fear.

We all know that we do it—or are at least tempted to do it. But how much does it really impact your portfolio outcome? I decided to run some numbers and take a look.

I looked at S&P 500 data from Yahoo Finance during the initial peak in January of 2022 until the latest peak on February 19, 2025. I compared the outcomes of several different made-up investors who all started with $500,000 invested in SPY (an S&P 500 ETF).

• Our super smart investor, John, not only decided not to sell, but he also added $1000 on the last trading day of every month until the new peak in February 2025.

• Our reasonably smart investor, Judy, decided to do nothing (neither buy nor sell) until the market had fully recovered to its previous peak (which happened in January of 2024) and then started adding $1000 a month like John.

• Our early anxiety investor, Bill, only waited until the market had dropped by 13% (which turned out to be 50% of its full loss) and then sold all of his stocks. He jumped back in when the market had recovered 75% of the loss. After full recovery, he began adding $1000 every month like the other two.

• Jill, held on until the market had lost 75% of its full decline (down 19%) and then sold all her shares. She jumped back in at 75% of the recovery like Bill and then started adding $1000 per month after full recovery like the rest.

• Frank, convinced he could ride it out, waited until 90% of the full market downturn (negative 23%) before he finally panicked and sold everything. Shaken by his misfortune, he waited until 90% of the recovery before jumping back in. Like the others, after full recovery, he started dollar cost averaging $1000 for the rest of the months until the next peak.

  
  

So, who do you think fared the best?

Here are some charts that show the results of my analysis:

The first one shows the total number of shares owned by each investor when it was all said and done at the peak in February 2025. The difference between John, who not only didn’t panic sell, but bought more shares throughout the decline, and Frank, who waited until near the bottom to sell and bought again near the top, is over 25%!

The effect of those loss of shares translates into $176,924.62 in portfolio value between the two extreme investors.

Next, I decided that none of the investors would contribute another penny to their accounts after February 2025, but they would all let them grow untouched for the next 10 years earning 7% interest. This chart shows the difference between the values of their portfolios in 10 years.

The difference between John and Frank? A whopping $348,037.50! What about the difference between Do-Nothing Judy and Frank? Still quite an amazing sum of $278,548.74!

So, if you are feeling tempted to jump out of the market during this downturn, keep these charts in mind!

In the history of our country since 1900, there have been only two identifiable 10-year time periods where you would have lost money invested in stocks. One is during the Great Depression. The other was from the peak of the dot-com bubble to the bottom of the Great Recession. That’s it. And the last one led into one of the longest bull runs in history.

Be a John—at least a Judy—and you can soon be the one bragging at the watercooler about your investing smarts!

Takeaway: Investor Behavior Matters More Than Market Timing

Staying invested—or even continuing to buy—can create six-figure differences over time. Fear is expensive. Patience is powerful.

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