Often, the word sell-off is used in conjunction with market volatility, but you may wonder what, exactly it means, especially when it comes to your money. A market sell-off occurs when a large pool of investors decide to sell stocks. When they do this, stock prices fall as a result.
A market sell-off may be due to external events, such as when regional lockdowns were announced following the escalation of the COVID-19 crisis. But sometimes sell-offs can be triggered by earnings reports that failed expectations, technological disruption, or internal shifts within an industry.
During a market sell-off, stock prices tumble. That stock volatility might lead other investors to wonder whether they should sell as well, whether they should hold their current investments, or whether they should buy while stock prices are low.
There is no “right” answer for whether to buy, hold, or sell a stock during a market sell-off, but understanding the nature of a sell-off—as well as the purpose of your investments—can help investors decide on the right strategy for them.
Understanding Bull Market vs. Bear Market
Understanding the overall market environment (as well as common stock market terms) can help investors understand how sell-offs exist within the market.
It’s not uncommon to see references to a bull market and a bear market. A bull market is when the stock market is showing gains. There are no specific levels of increase that indicates a bull market, but the phrase is commonly used when stocks are “charging ahead”—and is generally considered a good thing. A bear market, on the other hand, is typically used to describe situations when major indexes fall 20% or more of their recent peak, and remain there for at least two months.
There are also “corrections.” This is when the market falls 10% or more from a recent stock market high. Corrections are called such because historically, they “correct” prices to a longer-term trend, rather than hold them at a high that’s not sustainable. Sometimes, corrections turn into a bear market. Other times, corrections reach a low and then begin to climb back to a more level price, avoiding a bear market.
What To Do During a Market Sell-Off
A sell-off can make news, and can make investors edgy. After all, investors don’t want to lose money and some investors fear that a sell-off portends more bad news, like a bear market.
portfolio diversification strategy may be different between investors, but the underlying anchor of any diversification strategy is, “don’t put all your eggs in one basket.” Since it’s not unusual for a sell-off to affect only parts of the market, a diverse portfolio may be able to better ride out a market sell-off than a portfolio that is particularly weighted toward one sector, industry, or exchange.
online ETFs that can help you build a more diverse investment portfolio to hedge against ups and downs.
Protecting a Portfolio From Sell-Offs
In addition to building a portfolio that’s less vulnerable to market volatility, investors have several options to further protect their portfolio. These preventative investment measures can remove emotion during a market dip or sell-off, so that an investor knows that there are stopgaps and safeguards for their portfolio.
This is an automatic trade order that investors can set up so that shares of a certain stock are automatically traded or sold when they hit a price predetermined by an investor. This can protect an investment for an individual stock or for an overall market drop. There are several stop loss order variants, including a hard stop (the trade will execute when the stock reaches a set price) and a trailing stop (the price to trade changes as the price of the stock increases).
Put options are another type of order that allow investors to sell at a set price during a certain time frame; “holding” the price if the stock drops lower and allowing the investor to sell at the higher price even if the stock drops further.
Investors can also set limit orders. These allow an investor to choose the price and number of shares they wish to buy of a certain stock. The trade will only execute if the stock hits the set price. This allows investors freedom from tracking numbers as price points shift.
A market sell-off is triggered when a large group of investors sell their stocks at once, causing stock prices to drop. A sell-off can be caused by world events, industry changes, or even corporate news.
There is no one smart way to react to a sell-off. Different investors will gravitate toward different strategies. But by researching companies and setting up a portfolio based on risk tolerance, an investor can feel confident that their portfolio can withstand market volatility.
Digital investing tools can help investors keep track of stocks. One such online investing platform is SoFi Invest®. SoFi lets users buy and trade stocks in an easy-to-use app, as well as access professional research, daily business news, and actionable market insights. Investors can also build a portfolio through automated investing, buying pre-selected groups of stocks curated by investment professionals.
Find out how SoFi can help you build and reach for your financial goals.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.