Ask Matt: When should investors panic?

Q: When should investors panic? 

A: Investors are told to stay calm during volatility. But panic can be profitable, according to new research.

Alan Moreira and Tyler Muir, professors of finance at the Yale School of Management, say panicking and selling when stock-market volatility picks up can boost success. Stocks' returns aren't large enough to justify the risk investors are taking during volatility, they say. Investors get better risk-adjusted returns shifting to bonds and out of stocks when volatility is high and shifting back when it's low. Plus, when stocks get clobbered they tend to stay depressed for a long time, Moreira and Muir say. But volatility tends to be over quickly. Investors can duck out of the market during periods of high volatility and have plenty of time to get back in, the professors say. Real-life evidence, though, has shown how difficult it is to weave in and out of stocks. Famed investor Warren Buffett has built an enviable long-term record ignoring short-term swings and remaining invested. Again last year, two-thirds of active managers who tried to beat the market wound up lagging it, according to S&P Dow Jones Indices. Investors who panicked and sold stocks this February after the market dropped 10% on the year at that point may have locked in losses. That's a shame as the market has since recovered nearly all its losses this year.

Paste BN markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.