Other ways to describe it are surrender. Throwing in the towel. Giving up. Waving the white flag. Selling everything and fleeing.

Selling begets selling

Capitulation has been with us for some time, according to Google Trends, which says its spiking popularity came as a mere surprise, surprise a couple of months before September-October of 2008.

Simply put, capitulation is a slippery slope you start to slide down when the market (or a stock or stocks) starts down and heads that way for a while. That’s the idea behind capitulation, that at some point, no matter how many investors are still hopeful, the majority of them become panicked, and when the losses become intolerable, they finally give up and sell out, and that selling causes prices to fall even further, and then that produces a relief rally.

One of the signs of a capitulation, as you would expect, is a lot of trading, and heavy trading is a means “of shaking loose the weaker hands and only the Diamond Hands remain, so to speak,” according to Higgins. “Diamond hands,” according to Urban Dictionary, means having the fortitude to keep holding onto an especially risky financial position. Defying the Prudence of Wisdom This kind of fortitude might be seen as continuing to hold a losing position (wait for it to come back) or a winning position (wait to get even more) while pissing away the profit one already had.

Capitulation is also when investors are surer than ever that things can't get any worse. Should you be able to time this moment just right, and buy the market (or the individual stock that is tanking) at this very point, you could find yourself very wealthy, from here on in the market or stock(s) has nowhere to go but up.

You can't really see capitulation

It’s easy to say where the bottom is after the fact — but virtually impossible to forecast where it will be beforehand. To that end, the bottom of a stock dip is seldom tagged by panicky selling among investors (unless, of course, a specific news item has prompted the mass exodus.) The vast majority of the time, stocks quietly make a bottom little by little over time, perhaps within hours at times, in other cases over days or even weeks. In many cases, the bottom in a particular stock(s) or market occurs and investors have no idea until the recovery has occurred.

Ponder Gamestop (GME) before, not in January 2021. Could you have announced the bottoms for the stock at the time? It's doubtful. Neither would anyone else. Capitulation can only be determined on reflection. ASIDE: Another signal for a final capitulation (but one which has already occurred) is a price bounce shortly after the panic selling has exhausted itself.

“The stock market occasionally ends a bear market with a bang, or a whimper,” Jason Zweig wrote in the Wall Street Journal in 2008. You are more likely to see a unicorn in your backyard or a chimera in your kitchen than you are to find a clear sign of market capitulation. …Don’t be preying yourself on that you will even get a signal at all out of such a signaler as that.

Indeed, long-term investors with a plan would be most sensibly advised to disregard capitulation entirely. In short, the best you can do is to stick with your plan.

How to guard against it?

For instance, someone who might be at risk of panicking and selling whatever they possess could be calling their advisor every time the market moves, or continuously looking at their portfolio or even the market news, says behavioural researcher Samantha Lamas.

To prevent people from panicking and fiercely selling, Lamas says there are a few things investors can do.

• Begin by making a schedule for how often you check the market news or your portfolio balance, so that the constant fluctuations don’t interfere with your good judgment.
• Have a plan for what to do in the event the market falls — or soars.
• Formulate sell precepts, sort of like “I’ll never execute a new trade idea without running it by a trusted friend or relative beforehand.”

“This final rule adds a little bit of friction to the decision, and, we hope, makes the individual pause and not be impulsive,” Lamas says.

When should I sell my stocks?

As Christine Benz notes, you do not need to be an investing legend to know that it is seldom a good idea to be a seller in such episodes if you can help it. “Trying to get out of the market during a market collapse runs contrary to one of the most fundamental rules of successful investing: sell high. And those who panic-sell are likely to make emotional decisions that will undercut the success of their plans. Even a moment of emotional relief that selling might bring is often brief, as one so easily is replaced by another gnawing concern: Is it time yet to get back in? she says.

There may be a few circumstances in which it does make sense for investors to sell stocks, however, Benz says:

• You are approaching retirement and have to take risk off the table
• You have an investment horizon of < 5 years

You may capitulate if things sour: the first two scenarios serve as a risk-capacity check, or what might be called the “too-aggressive a portfolio” test compared to a spending horizon. But even if an investor has a long enough time horizon to ride out sharp drops in stocks, there’s another matter that can arise with too-risky portfolios, and that’s capitulation risk.

That’s my own term, and it refers to the risk that the investor will grow fearful so much so in the face of losses that he sells himself out of stocks, effectively realizing paper losses as if they were the real thing. While dumping stocks won’t be a strategic response in most scenarios, it may be worthwhile to trim back a bit on your stock allocation, while tossing a little extra on the bond and cash piles. Nervous investors, meanwhile, can examine the complexion of their equity portfolios more closely, ensuring a balance of value and growth stocks and some non-local country exposure.