When the stock market takes a turn for the worse, investing can be nerve-wracking. It is possible that your portfolio has depreciated, and it may be tempting to withdraw your money from the market before stock prices drop further.
If you are worried about losing money during this market downturn, you are not alone. But there is a simple and effective way to protect your savings regardless of whether this recession is getting worse or not: keep your money in the market.
Why Selling Your Investments Can Be Risky
During a market downturn, stock prices are lower. In some cases, some stocks can drop 20%, 30%, 40% or more when the market is in a recession.
If you withdraw your money from the market now, you will sell your investment at a discount. This will lock in your losses, and depending on how much you paid for your shares in the first place, you could potentially lose hundreds or even thousands of dollars.
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Also, if you’re selling now, you’ll likely need to reinvest your money at some point down the road. But since the market is so unpredictable in the short term, it can be hard to know when to buy again.
For example, consider the market crash of March 2020, in the early stages of the COVID-19 pandemic. When stock prices collapsed, many investors thought we were headed into a long-term bear market. In fact, the market rebounded almost immediately and went on to set records over the next two years.
If you had withdrawn your money from the market when it collapsed, not only would you have lost by selling at a discount, but you would also have had to reinvest when the prices were much higher. In the end, this would have cost you a lot more than if you had simply kept your investment.
A Safer (And Easier) Option
While it may seem counter-intuitive, one of the most effective ways to protect your money from market volatility is to do nothing. Don’t sell your investments, and don’t worry about trying to time the market. All you have to do is keep your stocks and ride the storm.
The reason this strategy works is that you technically don’t lose any money unless you sell it. Your wallet may be lost the valueBut losing value is different from losing money.
When stock prices go down, your investment isn’t worth much. But the market will inevitably rebound, and when that happens, stock prices will rise again – and your portfolio will regain the value it lost.
For example, let’s say you bought a stock for $200 per share, but its price has now gone down to $150 per share. If you sell now, you’ll lose $50. But if you hold your investment and wait for the market to recover, its price will likely rebound to $200 per share, and you’ll be back where you started – without losing a single cent.
The key to successful investing
The best way to ensure that your portfolio survives a market downturn is to invest in the right places.
Not all stocks will be able to recover from the recession, but strong companies are making the safest investments. While the strongest stocks will likely still see their prices drop during a downturn, they have a much better chance of rebounding when the market recovers.
No one knows for sure how long this economic downturn will last, but that doesn’t mean you can’t prepare. By double-checking that you are investing in solid stocks and then holding those investments for the long-term, you can keep your money as safe as possible.
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