Following up on this beginner's guide to making millions, let's examine the other end of the spectrum: What to do when the market hits the skids, taking your nest egg with it. Counterintuitive though it might seem, downturns actually represent opportunity -- if you know where to look. On that front, we're here to help.
As you watch your small pot of money become smaller still, it's probably natural to think the best course of action is simply to cut your losses by selling. Natural? Maybe. Logical? I don't think so for at least two reasons.
First, if Mr. Market forces your hand, he may also hand you a big tax tab. If the stocks you're selling have appreciated since you purchased them, you'll realize capital gains (i.e., profits), and the IRS will want its slice of that pie. If those gains are of the short-term variety (meaning you've held them for 365 days or less), that slice will be larger indeed: Depending on your tax bracket, you could surrender more than a third of your gains to the taxman. Ouch.
Second, even if your gains are of the long-term flavor, or if you'd perhaps avoid taxes altogether by losing money on the deal (oh boy!), "panic" selling is never a smart move. In the December issue of Motley Fool Green Light -- the investing and personal finance service designed with newbies in mind -- we outlined three compelling reasons to consider selling, and let's just say that "the Market made me do it" ain't one of them. (Get free access to that article and all the service's members-only content.)
Instead, think of a downturn as a choice opportunity to revisit your investment thesis. If it remains intact, your inclination should be to stand pat, or perhaps even consider dialing up your stake. When you're investing in quality companies, after all, even cheaper is even better.
Speaking of which ...
Take advantage of blue-light specials
Another smart way to think of a sell-off? Consider it a fire sale. When the market hits the skids indiscriminately -- based, for instance, on macroeconomic concerns, rather than the prospects of individual businesses -- it can be an excellent time to buy quality on the cheap.
As I've pointed out before, that doesn't make any of those stocks automatic buys, of course. Still, if you want to buy low in anticipation of selling high later on, downturns represent prime potential buying opportunities, not cause for despair.
The Foolish bottom line
That's particularly true, of course, if you're a brand-spanking new investor, or someone who has many years to go before retirement or big-ticket near-term goals approach. The task of sifting through the market's bargain bin can be daunting, but on that front, Motley Fool Green Light can come in handy.
In the issue we're prepping now, we'll zero in on the best bets for new money in the wake of the market's sell-off. In previous installments, we've highlighted a clutch of high-octane growth stocks whose price multiples look downright juicy. We've also profiled smart ways to hedge your portfolio against downturns.
Sound like useful resources? Excellent. Give Motley Fool Green Light a go. It's free, and there's absolutely no obligation to subscribe.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Washington Mutual is a Motley Fool Income Investor choice. The Fool's disclosure policy fears no downturn.