Is it safer to withdraw your money from the stock market or to continue investing for now?
IIt can be nerve-wracking to watch your portfolio constantly drop during bear market times. After all, nobody likes losing money; it defeats the very purpose of the investment. However, taking your money out of the stock market during downturns can often do more harm than good in the long run. Here’s why you should keep investing during these times.
Use downtime to reduce your cost base
Although no one likes to see the price of their investments go down, this can actually be a good opportunity for long-term investors, as it’s a chance to lower your cost base. Your cost basis basically tells you the average price you paid per share for a particular company. If you bought 10 shares of a company at $100 each, your cost base would be $100. If the stock price drops to $80 and you buy 10 more shares, your new cost base will be $90 ($1,800 spent / 20 shares held).
Reducing your cost base is valuable because it increases your profit each time you eventually sell your shares. Imagine you own 20 shares with a base cost of $90 and someone else also owns 20 shares of the same company but with a base cost of $100. If the price of that stock goes up to $150 and you both sell, you would have made $1,200, and they would have made $1,000.
Although you both own the same number of shares, your profits are higher because you were able to lower your cost base.
If you’re investing in healthy companies, don’t panic about short-term price drops; consider it a blessing in disguise and put yourself in a better position in the long run.
Time in the market matters
“Time in the market is better than market timing” is an investment saying that has stood the test of time – and it’s a saying investors should always keep in mind. On the one hand, it shows how nearly impossible it is to time the market consistently over the long term. It also speaks to the power of time in the market, especially when it comes to dividends.
Companies pay dividends to reward their shareholders for keeping their investments. If you invest in companies that pay dividends (preferably Dividend Aristocrats or Dividend Kings, which have also stood the test of time), you are doing yourself a disservice if you withdraw your money due to market declines. .
If you have $10,000 invested in a company or fund with a 3% annual dividend yield, you can expect to receive $300 in dividends each year. If the stock price goes up, you can expect this dividend payout; if the stock price goes down, you can expect that dividend payout. The company’s stock price shouldn’t be your only focus as long as it manages to keep paying dividends.
If you panic sell because the stock is falling, you are essentially removing a source of income that could prove critical to your return on investment. If the stock price goes down and the value of your investment loses $200 in one year, but you gained $300 from dividends, you still came out positive.
Don’t be an emotional investor
As an investor, it’s easy to be too high on short-term highs and too low on short-term lows. One of the best ways to eliminate some of the emotions associated with investing is to apply cost averaging. Cost averaging is about making consistent investments at regular intervals, regardless of the stock price at that time. This is how 401(k) plans work; regardless of the cost of the investments, you contribute the designated amount each pay period.
Focusing on the end goal and ignoring short-term volatility can make investing less stressful and can prevent you from making emotional decisions that could be against your long-term best interests. Keep your eyes on the prize.
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