Markets can be volatile. We’ve all seen that this year.1 But in moments of crisis, especially if you’ve lost your job or you’re worried about making ends meet, it can be tempting to pull out of your investments. But even in times of trouble, ditching the stock market isn’t always the best move to make. Here’s why.
Money and your emotions are like water and oil, they don’t mix well. It can be extremely hard to watch the stock market fluctuate. The big stock market dip in April was gut wrenching for a lot of us, but here we are only a few months later, and the S&P 500 experienced its best August performance since 1984.2 While it is very possible that there could be another dip this year, these fluctuations are very common and come with the territory.
This isn’t new
Did you know that since The Great Depression, there have been 13 recessions?3 What we’re going through right now is just the economic business cycle making its rounds again. These peaks and valleys are perfectly natural and expected, even though they may be exacerbated by extraordinary events.
When you see a dip in the market start to form, it can be very tempting to sell your investments to keep them from dropping further. However, you should try to avoid reactive responses.
Making a snap judgement 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.
Financial confidence is remembering that you are investing for the long-term. Short-term downswings are expected, and the best thing you can do is equip yourself with knowledge, and make informed rather than emotional investment decisions.
While everyone must determine for themselves what level of investment risk they're comfortable with, long term investors should consider the following.
A popular ways to invest in the stock market is to utilize the dollar cost average strategy.4 Dollar cost averaging works by investing a set amount of money every month and keeping that amount consistent over time (through ups and downs).
Whether you’re adding to your stock portfolio or your retirement fund, by investing the same amount each month, over time your average cost per share is likely to be less than the average market share price.4 When the market goes up, you’re buying fewer shares of high priced investments. And when market goes down, you’re buying more shares of lower priced investments. It’s a smart way to approach long term investing, as it can help to protect you against getting off track due to short-term market volatility.
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1 “The stock market is up from its coronavirus dip. Should you get out?”, Nova, A., CNBC.com, April 2020.
2 “Market Pulse from the SunTrust Investment Advisory Group, week ending August 31, 2020”, SunTrust.com, August 2020.
3 “How many recessions you’ve actually lived through and what happened in every one”, Huddleston Jr., T, CNBC.com, April 2020.
4 “Dollar Cost Averaging”, SunTrust.com, 2020.
Regular investing does not assure a profit or protect against a loss in declining markets. Dollar Cost Averaging involves continuous investments in securities regardless of fluctuating price levels. Investors should consider their financial ability to continue purchases through periods of low price levels.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. Past performance does not guarantee future results.
This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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