The onset of the COVID-19 pandemic sent the markets into a tailspin, which resulted in one of the biggest stock market crashes in recent history. Fast forward more than four years and the ride still isn’t over.
On Aug. 5, the U.S. stock market plunged as part of a global sell off fueled by fears of a U.S. recession. The U.S. market crash was the biggest drop in several years, according to CNBC.
Panic selling during these sudden dips is usually a mistake.
“The roller-coaster ride back up happens just as quickly,” Lee Baker, owner of Apex Financial Services and CNBC Financial Advisory Council member, told NBC affiliate 5 Chicago’s “Money Report,” which is produced in partnership with CNBC. Missing the recovery days “can crater your portfolio,” Baker said.
3 Good Reasons Not To Sell Off Investments When the Market Drops
Here are three reasons to stay invested when the market is down, according to Rachel Cruze :
Trying To Time the Market Is a Dangerous Strategy
No one can predict what the market will do. Sometimes it’s appropriate to sell off a stock or fund that’s underperforming over a long period of time. But day-to-day market swings should not throw you off your investing game. Remember that investing should be for the long term, and “slow and steady wins the race,” Cruze said.
Cruze explained that taking money out of your Roth individual retirement account or 401(k) before retirement age will result in significant taxes and fees. You could be hit with a 10% penalty plus incomes taxes on whatever amount you withdraw.
Even outside of a retirement account, panic selling could result in higher capital gains tax. That’s because the IRS taxes gains on investments held for a year or less at a higher rate than gains on investments held for longer than a year.
You’ll Miss Out on Compound Gains
The earlier you start saving and investing your money, the longer your money has to grow. Consistent contributions will lead to significant compounding. Cruze gave the example of starting at $0 and contributing $200 per month starting at age 22. With a 10% annual return, you’d have over $1.7 million by the time you reach age 65. You’ll have contributed just $100,000 of your own money over the course of 43 years and grown your investment by a factor of 17.
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