In March of 2020, the stock market hit a rough patch investors hadn't experienced in over a decade: a bear market. Bear markets are defined as periods when stocks lose 20% of their value or more, and while they do present investors with portfolio-building opportunities, they can also be worrisome.
Thankfully, the stock market has already recovered a large chunk of its losses from March, though stock values have yet to return to pre-pandemic levels. Meanwhile, millions of Americans are grappling with financial concerns as U.S. employment levels reach record highs and widespread economic recovery seems distant.
If you have money worries, or aren't feeling great about the state of the stock market, you may be tempted to unload some of your investments in the near term. That way, you can get some cash in hand to use in case your income gets cut, or another emergency arises. But before you do, ask yourself these critical questions.
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1. Do I really need the money, or am I motivated by fear?
If you've lost income during the COVID-19 crisis and are struggling to pay your bills, you're better off liquidating investments than racking up credit card debt to cover your expenses -- even if that does mean locking in losses. But if you don't actually need the money, you should aim to leave your portfolio alone. Though there's a chance stock values will decline in the course of 2020, especially if unemployment levels get a lot worse or there's a second wave of COVID-19 that threatens to overwhelm hospital systems, that shouldn't drive you to pull out of stock positions that may prove quite lucrative in the long run.
One thing you need to remember about the stock market is that it has a strong history of recovering from downturns, so don't let your fear of losses drive you to lock some in. If you're still earning the same paycheck you were pre-pandemic and your expenses haven't risen, then there's really no need to cash out investments when they may be down.
2. Do I have an emergency fund to tap?
The money you have tied up in stocks isn't money you should ever fall back on; that's what your emergency fund is for. If you have money in the bank for unplanned bills, you're better off raiding that account than touching your investments. Though depleting your savings may leave you feeling financially vulnerable, it pays to go that route before resorting to taking investment losses. Of course, if you don't have emergency savings, then you may have to unload investments if you have an immediate need for cash. But if that's not the case, your bank account should be your first resource to tap.
3. Can I borrow affordably?
Maybe you have a genuine need for money, and you figure you're better off cashing out some investments than building up a balance on your credit card. But before you do so, see if you can borrow money in a manner that doesn't harm your credit or cost you a fortune in interest. If you own a place of your own, you may be eligible for a low-interest home equity loan or line of credit. And if that's not an option, see if you qualify for an affordable personal loan through your bank before taking serious losses in your portfolio.
Whether you're tempted to liquidate some of your investments out of financial concerns, fear, or both, that's a move you might sorely regret afterward. Run through the above questions before selling investments right now, so you're better equipped to arrive at a logical decision.
