Unfortunately, a downturn in the stock market is inevitable. And while no one likes to see their portfolio fall in value, periods of deflation can actually be a good thing for many people and healthy for the stock market.
With the stock market currently in a bear market, there are at least two potential winners and one potential loser, and I’m not talking about individual stocks. Let me explain.
Winners: People who have time on their side
Time can be a huge force in investing. It not only fuels compound interest but also gives you time to recover from the inevitable downturns in the market. Not all companies will survive the downturns in the market, but it is absolutely certain that main indexes And the blue chip stocks will. Past performance does not guarantee future performance, but it is a really good indicator.
The Standard & Poor’s 500 Many use it as a general indicator of how the stock market is performing. Even during some of the worst economic times in US history – such as Black Monday (1987), the dotcom bubble (2000-01), the Great Recession (2008-2009), and the COVID-19 pandemic (2020) – – it managed to provide solid returns, If you look at it long term. The same goes for Dow Jones Industrial Average and the Nasdaq Composite.
There’s a reason conventional wisdom tells you to become more conservative in your investments as retirement approaches: You have much less time to recover if something goes wrong. If time is on your side, you can make higher-risk, higher-reward investments to focus on growing your money instead of just keeping it.
Winners: People who cost average in dollars
If you’re not careful, you could find yourself trying to wait for the “bottom” of the market to fall before continuing (or starting) investing. After all, why invest now when you can get the same shares cheaper later, right? not exactly.
Even if you manage to time the market all at once, it is impossible to do so consistently over the long term and set a bad precedent. Instead of trying to time the market – and risk getting a short end of the stick – investors should use it Average cost in dollars.
Dollar cost averaging is when an investor makes regular investments on a set schedule, regardless of the performance of the stock or the market in general. Good stock rise? invest. Looks like good stocks are falling freely? invest. Good stocks stagnant? invest. By sticking to a schedule and investing no matter which companies you believe in, you can prevent yourself from trying to time the market.
Using your dollar cost averaging during market downturns is also a great way to lower your cost basis, which determines how much you will ultimately profit (or lose) when you sell your stock. Your cost basis is the average stock price you paid for the stock, so the lower, the better.
Losers: Panic sellers are losing now
Panic selling is when an investor sees a drop in stock prices and decides to sell his stock prematurely to either cut his current losses or take profits before the price drops. Selling out of panic is not the right move at all. Not only can it hurt you in the present, but it can affect your financial future.
If you take advantage of panic saleYou will also need to consider the tax implications. If you hold the investment for less than a year, the profits will be taxed at the usual income tax rate. But if you keep it for more than a year, it will be taxed according to your capital gains rate. Aside from taxes, these are also stocks that have never given them a chance to rebound and may produce better returns in the long run.
You never want to make short-term decisions that conflict with your long-term interest. Keep your eyes on the prize, and be patient.