The Worst Thing You Can Do is Sell
Market turmoil is only temporary.
Over the past two weeks, the stock market has taken a major dive. From the high in early January to the low on Friday at market close the S&P 500 suffered an 18.66% decline. During trading hours on Friday, the S&P 500 briefly entered bear market territory, meaning a stock or an index has declined 20% from a recent high. The NASDAQ is already there, having declined 27.82% year-to-date.
If you invest in stocks, whether they be index funds or individual stocks, chances are you’ve seen major losses. Many investors feel a great deal of anxiety when they log in to their accounts and see the value of their portfolios dropping. It may be tempting in a moment of panic to sell your investments and move to cash. Maybe you think you can save yourself from further losses. You may even think you’ll be able to get back in at a lower price and make even more money on the way back up. But you’re probably wrong. The worst thing you can do is sell.
The market may drop even further from here. Or we may have hit the bottom already. No one actually knows, although there’s no shortage of people claiming to know. Some people think they can time the market by getting out and getting back in at the perfect times. That requires you to be right twice, a tough feat for even seasoned professionals.
But you may have logged into your accounts at some point in the last two weeks and second-guessed all your investment decisions. And if you only started investing during the last two years, this may be the first time you’ve seen the value of your investments drop significantly. To explain why selling is a bad idea, it may help to contextualize what’s happening in the market.
Early in the pandemic, easily accessible money due to low interest rates and stimulus payments poured into all kinds of assets. Stocks, real estate, cryptocurrencies, NFTs. But with inflation hitting hard and the Federal Reserve increasing interest rates in an effort to lower it, many of these more speculative assets1 are getting a reality check. People want assets that will grow in value. They want their money protected from inflation. And that either means buying inflation-protected bonds or buying stock in companies that will still make a profit over the long term. At the end of the day, you run out of people who want to pay millions of dollars for a JPEG.
Financial media, always looking for a narrative, lists all kinds of reasons for the stock market decline: The war in Ukraine, supply chain issues, consumer sentiment, inflation, rising interest rates, fears of an imminent recession. All of these issues, plus historically high stock market valuations, are likely driving the decline. But as I wrote the last time markets took a dip (although nothing like this!), you should ignore the headlines.
If you invest in low-cost index funds, you’re definitely feeling some pain right now. But your pain is nothing compared to those who’ve invested in individual stocks.2 If you invested in crypto or meme stocks, you’re getting killed right now.
If you’re holding a cryptocurrency and you’re sitting on a 90% loss, I don’t know what to tell you. I have no idea if the coin you bought will ever recover. Crypto is a highly speculative space, and while not every project is a scam, there are plenty out there that are. What I do know is that the stock market has grown consistently over time despite the worst periods of war and economic turmoil. This time is not different, and whatever happens next won’t be permanent.
Most of all, you should understand that your losses only exist on paper, or as numbers on a computer or phone screen. Selling your investments will force you to realize those losses. Holding onto them allows you to ride out the current volatility and keep growing your wealth.
If you invested money in the market, you signed up for the long term. Volatility is just the price you pay for investing in the kinds of assets that produce long-term returns that beat inflation. The best thing to do would be to hold onto your investments regardless of the short-term psychological pain you feel. Don’t look at your investments if they’re causing you that much anxiety. Don’t pay attention to what the market is doing or what you read in the news about stocks. None of that information is useful to you anyway as a long-term investor.
It also helps to keep things in perspective. The S&P 500 closed at about 3,900 points on Friday. The last time the S&P 500 was that low was only March 2021. In March 2020, the bottom of the stock market early in the pandemic, the S&P 500 dropped to about 2,300 points. But today’s stock market is still 69.26% higher than it was at its lowest point during the pandemic.
None of this is to say that the stock market can’t drop even further from here. That may well happen. But what may or may not happen shouldn’t influence your investing decisions. The only factors that matter are what you invest in and whether that investment is appropriate for your time horizon and risk tolerance.
If you’re focused on the long-term, keeping your money invested is always better than holding cash. There’s a saying that time in the market is better than timing the market. The problem with sitting on cash is that no one knows when the stock market will bottom and no one knows when it has peaked, so just invest when you have the money to do so. You should always maintain an emergency fund because you never know if an emergency will coincide with a stock market crash. But if you have more cash than you need for emergencies and short-term goals, it’s better off invested in the market.
Rather than think about the money you’re losing, you could see this moment as an opportunity to invest more. The money you have now can buy more shares of index funds at cheaper prices than it could just a few weeks or months ago.
If you’ve watched your investments decline dramatically over the past weeks, you’ve lost money only on paper. By selling your investments, you’d be locking in those losses. If you can hold on, then the current drop in the stock market will reverse and you’ll get back above water. No one knows how long this market turmoil will last, but what is almost certain is that the market will recover with time.
Speculative assets are those that investors buy hoping that they will increase in value at a later date despite not producing income, interest or earnings of any kind. You can only hope someone decides to buy them for more than you bought them.
Here are some stocks that skyrocketed during the pandemic and their fall from record highs: Block -70.39%, GameStop -70.57%, Moderna -71.88%, Netflix -73.06%, Etsy -73.61%, Shopify -78.48%, Zoom -83.95%, Peloton -91.08%