- Stock market turbulence has many investors looking at losses on their screens.
- It's important to avoid making rash decisions when the market is down.
Many people's brokerage accounts have lost money this year. Here's one thing you shouldn't do.
If you've been following the news, you may be aware that the stock market has been in a serious slump for much of 2022. In fact, the past five months have been riddled with intense volatility, so much so that even seasoned investors are getting spooked.
If you're new to investing, you may be growing increasingly nervous about your shrinking brokerage account balance by the day. And even if you've been an investor for many years, seeing a decline in your portfolio can be extremely upsetting and unsettling.
You may, in fact, be thinking of dumping some of your stocks to minimize the financial hit. But that's a mistake that could really end up costing you.
Don't rush to sell off investments
Imagine your brokerage account balance was $10,000 at the start of the year, and now, it's down to $8,200. On screen, that looks like an $1,800 loss. But in reality, it's not a loss at all. Rather, it's a hypothetical loss. And if you sit back and avoid selling off investments when they're down, your actual loss might amount to nothing.
The stock market has a long history of recovering from downturns and rewarding investors who stick with it. If you're seeing your $10,000 brokerage account balance whittled down to $8,200, it doesn't mean you've actually lost $1,800. And if you sit tight and wait for the market to recover, your balance might gradually work its way back up to $10,000.
Now to be fair, we don't know how long it will take for stock values to recover. You could end up waiting weeks or months for your brokerage account balance to climb back up. And that may not even happen this year.
But one thing's for sure -- if you unload investments while they're down, you'll guarantee yourself actual losses. In our example, liquidating your entire portfolio will mean losing out on $1,800. But if you do nothing, your portfolio might be worth $10,000 or more come this time next year.
Invest with caution
Investing money is a great way to grow it into a larger sum over time. But one thing you shouldn't do is invest funds you expect to need within a few years. If you do that, and the market tanks, you could end up in a real jam.
So, let's say you're hoping to buy a home in the next three years. You shouldn't keep your down payment funds invested in a brokerage account. Rather, you should stick to a savings account, where your balance won't shrink unless you take a withdrawal. Similarly, your emergency fund should be tucked away in the bank.
But if you have money you don't expect to need for many years, then investing it in a brokerage account is a good bet. That may mean enduring periods of volatility many times over. But if you do your best to keep your cool when investment values drop, you'll set yourself up to avoid actual losses and instead come out a winner.
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