When the stock market takes a turn for the worse, it can be nerve-wracking to invest. Your portfolio has likely dropped in value, and it may be tempting to pull your money out of the market before stock prices fall any further.
If you’re worried about losing money during this market downturn, you’re not alone. But there’s a simple and effective way to protect your savings regardless of whether this slump worsens or not: Keep your money in the market.
Why selling your investments can be risky
During a market downturn, stock prices are lower. In some cases, certain stocks can fall 20%, 30%, 40%, or more when the market is in a slump.
If you pull your money out of the market now, then you’ll be selling your investments at a discount. That will lock in your losses, and depending on how much you paid for your stocks in the first place, you could potentially lose hundreds or even thousands of dollars.
Also, if you sell now, you’ll likely need to reinvest your money at some point down the road. But because the market is unpredictable in the short term, it can be tough to know when to buy again.
For example, consider the market crash in March 2020, in the early stages of the COVID-19 pandemic. When stock prices crashed, many investors believed we were headed for a prolonged bear market. In reality, though, the market rebounded almost immediately and went on to set records over the next two years.
If you had pulled your money out of the market when it crashed, not only would you have locked in your losses by selling at a discount, but you also would have had to reinvest when prices were much higher. Ultimately, that would have cost you much more than if you’d simply held your investments.
A safer (and easier) option
While it may sound counterintuitive, one of the most effective ways to protect your money against market volatility is to do nothing. Don’t sell your investments, and don’t worry about trying to time the market. Simply hold onto your stocks and ride out the storm.
The reason this strategy works is that you don’t technically lose any money unless you sell. Your portfolio might lose value, but losing value is different than losing money.
When stock prices fall, your investments are not worth as much. But the market will inevitably rebound, and when that happens, stock prices will increase once again — and your portfolio will regain the value it lost.
For example, say you bought a stock for $200 per share, but its price has now dropped to $150 per share. If you sell now, you’ll have lost $50. But if you simply hold your investment and wait for the market to recover, its price will likely rebound back to $200 per share, and you’ll be right back where you started — without losing a dime.
The key to successful investing
The best way to ensure your portfolio survives a market downturn is to invest in the right places.
Not all stocks will be able to recover from a slump, but strong companies make for the safest investments. While even the strongest stocks will still likely see their prices drop during a downturn, they have a much better chance of rebounding when the market recovers.
Nobody knows for certain how long this downturn will last, but that doesn’t mean you can’t prepare. By double-checking that you’re investing in solid stocks and then holding those investments for the long term, you can keep your money as safe as possible.
The Motley Fool has a disclosure policy.