Investing is a great way to help your net worth get bigger over time. But it isn’t always a straight line up.
Uh, yeah. I’ve noticed.
The US stock market has been on a wild ride, especially over the past few years. But that’s not that unusual. The market is cyclical, meaning it regularly goes through periods of ups and downs. Like bull markets (when stocks are on the rise). And bear markets (when they’re not doing so hot). There are also recessions (when the economy in general is on a major decline), which tend to go hand-in-hand with bear markets. P.S. the last recession in 2020 was one of the most intense, but shortest ever – officially lasting just two months.
Should I sell stocks when the market drops to avoid losses?
Not if you didn’t have to. If you were already planning to invest for the long run, and you can afford to leave your money alone, hang in there when the market gets bumpy. Selling when prices have dropped locks in your losses. Stick it out, and your money could have an opportunity to recover.
So you’re telling me there’s a chance…
Of making back money you lose? Yes. Time is an investor’s best friend. The longer you keep your money in the market, the more chances it has to multiply and make up for past losses. And while no one knows for sure where stocks will go next, we can look at history for some hints. Aaand it’s good news. The US stock market has recovered from every major downturn in the past...and kept on climbing.
Should I invest more when prices are down to get in on that growth?
This move is called buying the dip. The whole idea of investing is to buy when prices are low and sell when they’re high. So, in theory, this could be smart. (But remember, nothing's guaranteed.) Take stock of your personal situation first. Before investing more, make sure your emergency fund is looking good and you don’t need this money for something more immediate.
Okay. And then when do I sell?
When you’re ready to check a money goal off your to-do list. Ideally, you set up a plan to invest money for big things like retiring or buying a home. Since there’s always some risk with investing – and stock prices go up and down on the regular – it’s good to be prepared with diversified investments that can handle the ride. Unless your goals change (or you really need the money), try to stick it out until you hit them.
I’m not sure I’ve got the stomach for that.
Then it might be time to revisit your risk tolerance. Generally, the longer you plan to invest, the more risk you can afford to take. Because your money should have time to make up for short-term losses. But if the idea of losing money stresses you out, owning a lot of stocks might not be right. Trading in your riskier investments (like stocks) for more conservative ones (like bonds) might not give your money the chance to grow as much. But sleeping at night counts for a lot.
Watching the stock market – and your money – bounce around isn’t fun. But panic-selling when prices are down means you’re stuck with those losses. Keep your long-term goals in mind. And try to tune out the noise.
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