Even knowing that bull markets don't last forever and bear markets are inevitable at some point, it can be tempting to get used to periods in which your stocks can seemingly do no wrong. I'm sure I'm not alone when I say that 2022 has taught me a valuable lesson regarding my holdings: Never get too comfortable.
However, regardless of how rough 2022 has been for my stock portfolio, I couldn't care less. Here's why.
I'm keeping my eyes on the prize
Unrealized gains and losses are gains and losses that aren't locked in stone. If I invest $10,000 in a stock and the value drops to $9,000, I haven't permanently lost $1,000 unless I decide to sell. Understanding that is important because it helps you look past the short-term price movements and focus on the bigger picture.
For example, a long-term investor who bought shares of Nike (NKE -0.20%) five years ago probably doesn't care that its stock price dropped more than 15% from September 2018 to October 2018, more than 34% from February 2020 to March 2020, and more than 32% in this calendar year (as of August 22, 2022). Why? Probably because the stock is up more than 106% over the past five years. You never want to abandon the ship just because the waters get a little rough.
Stock prices will always fluctuate, so your unrealized gains and losses will always fluctuate. If you get too stuck on the short-term price movements, you'll be more worried about how much your investments are worth that day than about consistently building stakes in stocks you plan to hold for the long term. What matters most is that over time, stocks produce value, and when it's time to reap the fruits of your labor near retirement, your consistency will pay off in the form of compound earnings and dividend income.
I know panic selling is counterproductive
Prematurely selling stocks during down periods in the stock market can be a double whammy. On one end, if you're selling your stocks for a profit, it'll create a tax bill; whether you're paying your income tax rate or a capital gains rate, it can add insult to injury. Especially if you're panic selling because prices are dropping, and then you find yourself having to owe more on top of that.
I'm also aware that any shares I sell right now are shares that I didn't give a chance to grow in the future. Selling $10,000 worth of stocks today becomes more expensive when you look at the potential. At 8% average annual returns over 20 years, $10,000 would be worth more than $46,000. I'm at the age at which my focus is on growing my money so I'm properly prepared for retirement, and selling shares or not investing during down periods is counterproductive to that.
I use dollar-cost averaging
One of the best things I started doing as an investor is using dollar-cost averaging, which involves investing a set amount in my stocks at regular intervals. The key to dollar-cost averaging is that you make the investments at your predetermined times regardless of stock prices. For example, you could decide to invest $500 in the S&P 500 every other Monday. It doesn't matter if the S&P 500 is up 20%, down 20%, or flat; when every other Monday comes around, you make the investment.
Since I dollar-cost average, I haven't viewed the 2022 slump as a bad thing. If anything, it's given me the chance to lower my cost basis on some stocks I might've overpaid for during the bull run from March 2020 to December 2021.
Your cost basis is the average price you've paid per share of a stock, and it's what ultimately determines how much you profit (or lose) when you eventually sell. If you bought 10 shares of a stock that were $100 each, your cost basis would be $100. If the price dropped to $80 and you bought 10 more shares, your cost basis would now be $90. If two people own the same number of shares and sell them for the same price, whoever has the lower cost basis will profit more.
More than anything, I've learned to look at these times as a blessing, because many great companies are trading below their intrinsic (true) values.