Markets can be volatile, especially in a year like 2020.Disclosure 1 And in moments of crisis, especially if you’ve lost your job or you’re worried about making ends meet, it can be tempting to sell every stock you own. But even in times of trouble, ditching the stock market isn’t always the best move to make.
If you’re wondering when to sell stocks, here are three things to know when it comes to investing in the midst of a market dip.
1. It’s not permanent
Did you know that since the Great Depression, there have been 13 recessions?Disclosure 2 What many of us have been through a couple times now is part of the natural economic business cycle. The highs and lows of the stock market are expected, even though they may be exacerbated by extraordinary events, like a pandemic. COVID-19 shocked the world, but so did the S&P 500—which tracks 500 of the most profitable companies in the U.S.—when it dropped by 12% in just seven days between March 4 and March 11, 2020.Disclosure 3
However, despite lockdowns and layoffs, the S&P 500 began to recover as early as April. And later that year, the S&P 500 saw its best-performing August since 1984.Disclosure 4
2. Trust the process—not your emotions
Investments and your emotions are like water and oil: They don’t mix well. It can be hard to watch the stock market fluctuate, especially when that instability is combined with personal hardships like many have experienced during the COVID-19 pandemic. When you see a dip in the market start to form, it can be tempting to sell your stocks to keep them from dropping further. However, you should try to avoid reactive responses.
Making a snap judgment to withdraw from the market completely because you get nervous could potentially leave you with a loss. Likewise, seeing the market drop and halting on additional investments until it balances out again could lead to missed opportunities.
Don’t rely on your emotions when it comes to investing. Instead, we recommend meeting annually with an experienced financial adviser—preferably one with a Certified Financial Planner® (CFP) designation—to help you make informed decisions.
3. Time is more important than timing
Investing is a long-term strategy in itself, not a get-rich-quick scheme. For most investors, time in the market is more important than timing the market. Everyone must determine for themselves what level of investment risk they’re comfortable with, and investors should stick to a strategy that works for their goals.
One popular way to invest in the stock market is to utilize the dollar-cost averaging strategy.Disclosure 5 Dollar-cost averaging works by investing a set amount of money on a schedule—like once a week or once a month—and keeping that amount consistent over time (through both ups and downs). The idea is that you never know when a stock might rise or fall, but by buying the same stock regularly, you’re more likely to get it for a good price and less likely to be impacted by sudden dips. The way most people invest in their 401(k) retirement accounts is a perfect example of dollar-cost averaging at work.Disclosure 5 When the market goes up, you’re buying fewer shares of high-priced investments. And when the market goes down, you’re buying more shares of lower-priced investments.
Diversification is another important strategy. Consider investing across industries and asset types using products like mutual funds and exchange traded funds (ETFs).
Back to the S&P 500 example from August 2020—if all your investments were in hospitality and travel companies, you would have missed out on the recovery. Investing in index funds that track the S&P 500 is an easy way to avoid this; however, it’s important to talk with an experienced financial adviser when deciding how to diversify.
Stay the course
Your financial confidence and mental resilience will grow when you’re focused on investing for the long term. Short-term downswings are expected, and the best thing you can do is invest in your own knowledge so you can avoid rash, spur-of-the-moment decisions. Long-term investing, like life, works best when you stay true to your values and maintain a positive outlook for all that’s to come—through the dips and the climbs.