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If you’ve been following the news, you might know that the stock market has been in a serious downturn for much of 2022. In fact, the last five months have been marked by intense volatility, so much so that even the Seasoned investors are getting scared.
If you’re new to investing, you might be getting more and more nervous about your brokerage account balance dwindling day by day. And even if you’ve been an investor for many years, seeing a decline in your portfolio can be extremely upsetting and unsettling.
In fact, you may be considering getting rid of some of your stocks to minimize the financial consequences. But it’s a mistake that could really cost you dearly.
Do not rush to sell investments
Imagine your brokerage account balance was $10,000 at the start of the year, and now it’s down to $8,200. On screen, it looks like a loss of $1,800. But in reality, it is not a loss at all. Rather, it is a hypothetical loss. And if you sit back and avoid selling investments when they’re down, your real loss could be zero.
The stock market has a long history of recovering from downturns and rewarding investors who stick with it. If you see your brokerage account balance reduced from $10,000 to $8,200, it doesn’t mean you’ve actually lost $1,800. And if you sit back and wait for the market to recover, your balance could gradually climb back up to $10,000.
Now, to be fair, we don’t know how long it will take for stock values to recover. You could end up waiting weeks or months for your brokerage account balance to go up. And that may not even happen this year.
But one thing is certain: if you unload investments while they are exhausted, you guarantee real losses yourself. In our example, liquidating your entire portfolio will mean a loss of $1,800. But if you do nothing, your wallet could be worth $10,000 or more by this time next year.
Invest with caution
Investing money is a great way to turn it into a bigger sum over time. But one thing you shouldn’t do is invest funds that you think you’ll need in a few years. If you do this, and the tanks market, you could end up in a real traffic jam.
So let’s say you hope to buy a house within the next three years. You should not keep your deposit funds invested in a brokerage account. Instead, you should stick to a savings account, where your balance won’t decrease unless you take a withdrawal. Likewise, your emergency fund should be hidden in the bank.
But if you have money that you don’t think you’ll need for many years, then investing it in a brokerage account is a good bet. This can mean enduring bouts of volatility multiple times. But if you do your best to keep your cool when the value of investments drops, you’ll prepare to avoid real losses and come out on top.
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