Investing in the stock market is a great way to let your money make you money. Instead of letting your money sit in a savings account accruing 0.09% interest or less, investing in stocks can easily grow your funds to help provide you with a cushy retirement fund. The trick with investing in the stock market is to know that you’re in it for the long haul. It’s all about long-term growth rather than short-term success.
When the stock market appears to take a dip, many people panic and decide to withdraw their funds earlier than planned. While understandable, this can be a huge mistake as it is nearly impossible to predict exactly when the best time is to sell all your stocks. To make the best decisions when it comes to your investments in the stock market, you need to understand the nature of the game.
A bull market is the run of days in which the stock market hasn’t declined 20% from the high water mark of that run. We are currently in the second longest bull markets in the history of the U.S., the longest being the one that lasted from 1982 until the dot-com bubble burst in 2000. While this current bull market has lasted since 2009, at some point the stock market is going to correct. When a bull market lasts this long, people get nervous and make split-second decisions with their investments. The best thing to do when you feel the stock market is about to go down is to do nothing.
Playing the stock market is a long-term investment, and dips in the stock market are typically short-term factors. The money you invest in the stock market should be heavily diversified as investing in the stock market should be a long-term investment where you sit and wait. The time to withdraw your funds and cash out is when you have reached the point where you are ready to use that money.
Stock Market Crashes
When the stock market crashes it can feel like the end of the world. Overnight it seems like all of your investments have dropped to next to nothing. But the reality is that the stock market crashing is a normal part of the investment cycle. It’s happened before, and it will happen again. At one point or another, you are going to lose a lot of money in the stock market.
The good news is that when the stock market crashes, a recovery comes after. Whether it’s taken months or years, the stock market has always recovered and comes back every single time stronger than it was before.
Why You Shouldn’t Sell Before You’re Ready
It’s impossible to predict where the top of the market is going to be. If the market continues growing but you withdraw everything now, you’re losing out on the growth you could have achieved by keeping your stocks. The ability to correctly pinpoint the exact moment you should withdraw is available only in hindsight, so unless you’re ready to withdraw all of your stocks and quit the game altogether, you’re better off leaving your stocks where they are until you’ve reached that point.
Even if the market does drop, in the long run it will resettle and pulling early will take you out of the game completely. If you’re not planning on accessing your funds for a number of years, then there’s no harming in waiting it out until the stock market picks up again. It makes no difference to the money that you do have access to and any losses you suffer you’ll recoup when the market picks up again.
When It Is A Good Idea To Sell
One reason it would be a good idea to sell your stocks is if you’re interested in rebalancing your stocks and your bonds. If you have a goal of investing a certain percentage of your money in stocks and the rest in bonds, you may want to rebalance to adjust for the growth you’ve achieved from stocks. Selling stocks to return yourself to your original balance is simply a way to stick to the plan you set for yourself rather than a knee-jerk reaction to dips in the stock market.
If you’re approaching your target date of when you want to use the money you’ve made from investing in stocks, this is the time that it’s appropriate to sell. Short-term goals such as buying a house are an appropriate reason for withdrawing your long-term investments. If you’ve invested in order to save up for retirement, you can withdraw slowly as you likely won’t spend the majority of your funds in the first few years of your retirement. Many people move their money into something a bit safer once they retire to ensure that fluctuations in the stock market don’t affect their investments as much now that they’ve reached the point where they’re ready to use them.
What You Can Do
One thing that you can do to protect against the stock market crashing is to invest in bonds as well as stocks. Bonds are a lower-risk, lower-return investment than stocks and will help provide a cushion during a stock market crash.
Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand. If you have a low risk tolerance, you’re more likely to panic and sell at the wrong time. Having the right balance between the amount you have in stocks and the amount you have in bonds will help give you peace of mind during the more volatile periods of the stock market.
If you’re an experienced investor working the stock market the rules are different; but if you’re an average person just looking to make smart choices when it comes to investing, you’ll want to play the long game. Don’t make impulse decisions based on short-term fluctuations when you’re making a long-term investment in the stock market.