This year has been brutal for many reasons, and investors have had to buckle up and hold on to survive the stock market's wild ups and downs. Between the market's nosedive back in March and its remarkable comeback over the following months, it's been a roller coaster, to say the least.
Now with a hard-fought presidential vote coming up, there's a chance the market could take a turn for the worse yet again. But if you're thinking about selling your investments to get ahead of the potential volatility, that could ultimately cost you tens of thousands of dollars.
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You could miss the rebound
When you attempt to buy or sell investments at precisely the right moment based on how you predict the market will perform, that's trying to time the market. While it sounds good, it's more difficult in practice.
Say, for example, you sold your investments on April 1, just after the stock market had hit rock bottom. At the time, you may have predicted that the market was going to drop even further, so you wanted to get out before losing any more money.
But that was around the time the market started to rebound. Between April 1 and Oct. 25, the S&P 500 jumped by approximately 40%.
The average retirement account balance is roughly $107,950, according to Fidelity Investments. If you had that amount invested in S&P 500 index funds and you sold all your investments on April 1, you'd have missed out on around $43,180 in growth.
In hindsight, it's easy to see that it would have been wise to reinvest once the market started to bounce back. But in the moment, it can be incredibly difficult to know whether stock prices will continue to climb or plummet once again. This is what makes timing the market so challenging: It's impossible to know exactly what the market will be doing months from now.
A better approach to investing
Nobody knows what the market will do around Election Day or beyond. Some experts are predicting another crash, especially as coronavirus cases are climbing at an alarming rate.
But the market could also continue upward despite everything else going on in the country. If that happens, selling now could be an expensive mistake.
Because the future is uncertain, one of the best investing moves you can make is to put your money behind solid investments and then hold them for as long as you can. The market could experience a downturn in the next few weeks or months, but even if it does, it shouldn't necessarily affect your investments if you're not planning on selling for years or even decades.
You won't lose money on your investments unless you sell when stock prices are down. So no matter how grim the market gets, remember that it has experienced countless slumps before and has always managed to pull through them. As long as you invest wisely and avoid panic selling, waiting it out might be your best move.
