Let’s tackle a topic that has been on many investors’ minds in the last few years, and has prompted more than just a few blog postings.
Being worried during market downturns is understandable and NORMAL; but I want to emphasize the importance of viewing investing as a long-term endeavor, and how to avoid (and why you should avoid) selling after a market downturn.
When you started investing did you think that the market would be on a continual upward trajectory until you reached retirement age? I hope not, and if you only recently began on your investing journey, please know that market fluctuations will happen, many times from now until you retire.
Review the chart below which shows the S&P 500’s up years (green) and down years (red). Does it look evenly distributed between the good and bad years? No, not even close, since 1927 there have been 30 down years….and 66 positive years.
So why am I showing you this? To talk to you about what happens if you sell during the downturn years. You “lock in” your losses. Locking in your losses means you are trying to sell before you “lose” more money, when in fact, your money is not lost UNTIL you sell during that downturn.
Imagine your portfolio was worth $150,000 at the beginning of a year which (for simplicity’s sake) was comprised of 150 shares of ABC at $1,000 a share. A few months into the year, the market has a readjustment or downturn, and you sell when your portfolio value is at $100,000. This means your ABC shares dropped in value from $1,000 to $666.67.
You made this decision because you think you will re-enter the market when you see the market turning around. A few months later you notice some positive trends and even your ABC shares are back up to $850 a share and you are ready to re-invest.
The $100,000 in your portfolio now only buys you 117 shares of ABC. When ABC returns to $1,000 a share your portfolio is worth $117,000. Had you held your shares your portfolio would be back to $150,000, but it’s not, because you locked in your losses.
The question you need to ask yourself during these downturns is “do I think the stock market will bounce back”, if the answer is no, then you probably shouldn’t be investing to avoid unnecessary headaches. If the answer is yes, then you can put down your statements, turn off the news, and wait out what the market has historically done, rebounded.
Has anyone told you to “buy high and sell low”? Again, I hope not, so why do we do think it is a wise decision to do this with our entire portfolios?
Because we are emotional beings and we make decisions based on fear and our emotions, instead of what we know to be true.
In fact, during market downturns is when an investor can realize increased returns by buying more investments when they are at a discounted price.
Let’s return to our example, imagine you held steady with your 150 shares of ABC, and near the bottom of the downturn you invested $10,000 more while ABC was $700 a share (14 more shares), when ABC is back to $150 a share your portfolio would be worth $164,000.
Long-winded post shortened up: your investment plan is curated specifically for you and your objectives, straying from this plan can cost you dearly if you make decisions based on short-term market fluctuations.
If you have any concerns or questions about your investments or the current market conditions, don’t hesitate to reach out. Remember, we’re here to provide guidance and support to help you navigate through different market environments.