When volatility surges and chaos reigns in the market, the temptation to sell your stocks is quite acute. Especially if you love to get minute-by-minute price updates from your phone, seeing a torrent of notifications about your cherished stocks plummeting gets old very quickly. All the while, the allure of a rapid escape is tantalizingly near -- just liquidate your positions by pressing a few buttons.
But the promise of salvation through panicked selling is a false one that will harm your financial future if you allow it to control you. So, let's take a look at five reasons why you should keep your stocks just the way they are during a crash.
1. Selling realizes your losses permanently
Perhaps the most immediate reason not to sell your holdings during a market crash is that selling chisels your losses indelibly into your portfolio. If you invested $1,000 into a stock then sold it for $750 after a collapse in the market the next day, you're tangibly deprived of that $250 forever. In such a case, your other investments would need to grow to make up the difference in your portfolio, or you'd need to invest that much more to get back to where you were before.
In the very long run of the American stock market so far, crashes haven't ever led to a permanently lower price level. After the sharp correction of late 2018 and the coronavirus crash of 2020, the market rebounded to surpass its previous highs before a full year had passed. Selling during the fall would have made investors miss out on future gains in both cases.
There's no guarantee that your stocks will grow again to reach their prior level, but if your portfolio is sufficiently diversified, you can bet that the show will go on after a major dip. So, it's best to stay the course by not selling and give your stocks a chance to recover.
2. There's nothing different about your companies
As an intelligent and empowered investor, you should be making the decision to buy or sell based on the financial strength and competitive capabilities of the businesses that underlie stocks. That means keeping your attention focused on fundamentals like revenue, profitability, management, and competitive advantages relative to other companies in the same industry. For the most part, the movement of the market has nothing to do with any of those factors, regardless of whether there's a juicy feast for bears or a wild bull run.
Unless one of your companies is desperately in need of a high stock price to support a future round of share issuance and fundraising -- in which case it might not be a good investment to begin with -- a crash changes nothing. So, it doesn't make much sense to sell, because the company can still compete successfully after a correction (assuming it ever did).
If that doesn't seem right to you, take a look at AbbVie's (NYSE:ABBV) price behavior during and after the 2020 collapse. It fell, but recovered to its prior high in less than a quarter's time because it was still just as good of a business afterward as it was before.
3. You'll miss out on dividends
Dividends are a key component of a stock's total shareholder return. If you dump your shares, you don't get the regular dividend payments that you were previously entitled to. In the case of a strong dividend stock like AbbVie, you could be missing out on a yield of around 4.5% per year, which grows quite quickly over time. That's a problem because it means that your portfolio will compound more slowly.
Of course, you'll also miss out on special dividend payments, which can sometimes be quite substantial. Companies like Costco (NASDAQ:COST) are known for surprising shareholders with extra cash, and there's simply no chance for such a pleasant event if you don't own the stock anymore.
4. You could get taxed on the sale
Paying taxes is part of being a responsible citizen, and shrewd investors understand that paying some taxes on their capital gains is necessary for society to function. But you should try to avoid incurring unnecessary tax burdens by panic selling.
If a stock was worth more than you bought it for when you sold it, you'll probably owe taxes on the sale. The fact that the market crashed isn't relevant. The amount that the holding dropped isn't relevant either, as long as it's higher than your entry point.
If you held the stock for less than a year before the surreptitious selling, you could owe a short-term capital gains tax rate of up to 37% on the transaction. That could seriously chip away at your portfolio's value.
5. It's a bad habit
Emotions are a happy inevitability both in human life and in investing. But you shouldn't get into the habit of letting your anxiety or euphoria run the show. Your emotions are often intense and reactive to dynamic short-term events like a market crash. They can lead you astray by suggesting that selling your holdings is a solution to the anxiety that's caused by falling prices.
Did I say lead you astray? Actually, the emotional proposition can be entirely correct: Selling your stocks will indeed make your anxiety go away somewhat. But it'll also make your portfolio's prospects of recovery very much diminished. Nip the bad habit in the bud by exercising your long-term thinking when the market is falling and anxiety is knocking.