(Katy Brockman)
When the stock market turns bad, investing can be nerve-wracking. Your portfolio may have lost value and you may be tempted to get your money out of the market before share prices fall further.
If you’re worried about losing money during this market downturn, you’re not alone. But whether or not this recession gets worse, there’s a simple and effective way to protect your savings: keep your money in the market.
Why selling your investment can be risky
During market downturns, stock prices are lower. In some cases, certain stocks can drop 20%, 30%, 40% or more when the market is down.
If you took your money out of the market now, you would be selling your investment at a discount. This locks in your losses, and depending on how much you pay for the stock in the first place, you could lose hundreds or even thousands of dollars.
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Also, if you sell now, you may need to reinvest your funds at some point later. But since the market is unpredictable in the short term, it’s hard to know when to buy again.
For example, consider the March 2020 market crash in the early days of the COVID-19 pandemic. When stock prices plummeted, many investors thought we were heading for a long-term bear market. But in reality, the market bounced back almost immediately and continued to set records for the next two years.
If you withdraw your money when the market crashes, not only will you lock in your losses by selling at a discount, but you will also have to reinvest when the price is much higher. Ultimately, this will cost you more than simply holding your investment.
Safer (and easier) option
While it may sound counterintuitive, one of the most effective ways to protect your funds from market volatility is to do nothing. Don’t sell your investments and don’t worry about trying to time the market. Just hold your stock and ride out the storm.
The reason this strategy works is that you are not technically losing money unless you sell.Your portfolio could be lost valuebut losing value is not the same as losing money.
When stock prices drop, your investments don’t have as much value. But the market will inevitably bounce back, and when that happens, the stock price will rise again – and your portfolio will regain the lost value.
For example, let’s say you bought a stock at $200 per share, but it’s now down to $150 per share. If you sell now, you will lose $50. But if you just hold the investment and wait for the market to recover, its price could bounce back to $200 a share and you’ll be back where you started — without losing a penny.
The key to successful investing
The best way to ensure your portfolio survives a market downturn is to invest in the right places.
Not all stocks recover from the slump, but strong companies make the safest investments. While even the strongest stocks can still see price declines in a downturn, they have a much better chance of rebounding when the market recovers.
No one knows for sure how long this downturn will last, but that doesn’t mean you can’t prepare for it. By double-checking that you’re investing in sound stocks, and then holding onto those investments for the long term, you can keep your money as safe as possible.
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