Panic selling in the wake of Jim Flaherty's income trust announcement risks making a bad situation worse.

It’s easy to tell people not to panic in the wake of Finance Minister Jim Flaherty’s bombshell announcement on Halloween night, which appears to have effectively killed Canada’s burgeoning income trust industry.

It’s quite another thing for people to remain calm in this situation, especially with the TSX down 275 points within 15 minutes of the opening bell on Wednesday.

Let’s not sugar-coat things. Flaherty’s pre-emptive strike fundamentally changes Canada’s financial landscape and will cost investors tens of billions of dollars by the time all is said and done. Market valuations of trusts will dive immediately and distributions will eventually be slashed when the new rules take full effect on 2011.

Everyone with a stake in income trusts will be hurt. The biggest hit will be taken by retirees who have come to depend on trusts for cash flow and who have a lot of their savings invested in these securities. But the pain will also be felt by mutual funds, pension plans, and other institutional investors.

But picking up the phone now and telling your broker to bail out isn’t the solution. You just risk making a bad situation worse. In situations such as this, the markets are immediately swamped with sell orders and there are few buyers. That kind of supply-demand imbalance drives prices down to unrealistic lows. Would-be sellers who enter market orders in such situations risk being taken out at prices well below what their shares will be worth when conditions stabilize.

So my advice is to sit tight while we assess the total situation. Give the markets time to regain stability and a sense of proportion. You won’t avoid losing money by being patient, but you’ll be able to mitigate your losses and do some intelligent tax planning.