Equity markets have been under pressure recently, with the S&P 500 closing lower in nine of the thirteen trading sessions so far in September. While the Index is only about 4% from a recent record-high, volatility tends to make investors antsy. As Mike Tyson famously said, ‘everyone has a plan until they get punched in the mouth.’ A recent research paper published by a group of MIT professors analyzed the propensity of investors to engage in ‘Panic Selling’(1). The conclusions of the paper are worth considering in light of recent market gyrations.

The study looked at the trading patterns within 600,000 individual brokerage accounts belonging to just under 300,000 households during the period between 2003 to 2015. The goal was to derive some insight into panic selling by individual investors, which they defined as a decline of 90% of a household account’s equity assets over the course of one month, where at least half of the decline was due to trading. Below are the main takeaways from the research.

Driven by Volatility

About 9% of the households analyzed panic sold during the period of analysis. The study showed that while panic sales occurred regularly over the thirteen-year observation period, they were overwhelmingly clustered around episodes of heightened volatility in the stock market.

Demographics of Panic the Sellers

Certain individual characteristics suggested a higher likelihood of panic selling. These include:

  • Male
  • Older than 45
  • Married
  • High number of dependents
  • Self-declared high level of investing experience/knowledge

These characteristics likely do not come as a surprise. Other behavioral studies have shown that men tend to struggle with overconfidence more so than women(2). Older investors may be closer to retirement and, therefore, might be more concerned about their portfolio’s ability to quickly recoup losses suffered in a downturn. The most interesting characteristic was the high level of investing experience and knowledge. This group apparently knew just enough to be dangerous, as they were substantially more likely to panic sell than the investors with limited/no investing experience/knowledge.

Panic Selling Hurt Performance

The study showed that when timed well, selling risky assets in the early stages of a large market downturn did, in fact, protect investor capital. The problem with this, however, is that it is impossible to know when you are in the early stages of a large downturn. Consequently, the median investor in the study earned a negative return following their panic sell. Interestingly, rather than being a function of exiting the market at the wrong time, most of the underperformance was due to waiting too long to get back into the market. In fact, nearly a third of the investors that panic sold in the study never reinvested in the stock market.

As we discussed (here), volatility is a normal and healthy feature of the market. Historically the S&P 500 has experienced a 5% or greater drawdown about three times per year on average. Thus far, in 2021, we have not had one. While we do not know if the current bout of volatility will take us there, rest assured there will be more 5%+ drawdowns in the future. This study serves as a good reminder that investors are best served by tuning out the noise and sticking with their long-term plan.

1. Elkind, Daniel and Kaminski, Kathryn and Lo, Andrew W. and Siah, Kien Wei and Wong, Chi Heem, When Do Investors Freak Out?: Machine Learning Predictions of Panic Selling (August 4, 2021). Available at SSRN: or

2. Brad M Barber and Terrance Odean. Boys will be boys: Gender, overconfidence, and common stock investment. The Quarterly Journal of Economics, 116(1):261–292, 2001.


  • This week will be headlined by the conclusion of the FOMC meeting Wednesday afternoon. The official committee statement will be released at 1 CT, followed shortly thereafter by a press conference by Chairman Jerome Powell. The consensus is that the Fed will leave interest rates unchanged at the zero-bound. What there is less agreement on is whether or not the Fed will announce its intention to begin ‘tapering’ its bond purchase program. There generally seems to be some agreement that they will begin to scale back purchases this year.
  • In addition to the press release, the Fed will publish its Summary of Economic Projections and the dot plot (which it does at the conclusion of every other meeting). The market pays close attention to the dot plot, as it illustrates each individual committee member’s expected path of interest rate movements over the next few years. The median estimate is often viewed as a proxy for the Fed’s expected path of interest rates (something that Powell repeatedly cautions against). The June dot plot surprised investors as two committee members penciled in two 0.25% hikes in 2023, despite no expected hikes per the March dot plot.
  • Other economic data to be published this week includes flash PMIs, jobless claims and the Index of Leading Economic Indicators on Thursday. Additionally, on Friday, several Fed officials are slated at various public speaking events.


Source: MarketWatch



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Source: Morningstar Direct.

Source: Morningstar Direct.



Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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