Have you ever heard the expression “Buy low, sell high”? This common wisdom suggests that we should buy assets (such as stock market shares) when they are priced low relative to their value.
However, whenever the stock market drops, as it started doing dramatically last week, people can react emotionally and want to sell their investments or stop investing more money to prevent further “losses”.
The reality is you will have an actual loss (versus what is called a “paper loss,” or “a loss only on paper”) IF you sell your investments.
Think of it this way. If you bought a house during the COVID housing bubble and the home values in your neighborhood dropped substantially shortly after purchase, it might be valued at less than you bought it for. But you wouldn’t reasonably think to yourself, “Oh no, the home values dropped, so I should sell my house to prevent further losses!” You would only take a loss IF you immediately sold your home at the lower value. If you instead decide to hold onto the home for the long term, chances are that drop is only temporary, and values will increase over time.
When the stock market drops, this means that the Share Prices have dropped, or, putting it another way, that they are now on sale. This is where ‘buying the dip’ comes into play.
Here’s the math:
# of Shares * Share Price = Account Value
However, what’s not totally obvious is that while the number of shares in their portfolio has remained the same, it’s the share prices that have dropped.
So, while we don’t know what the future will hold, if you are a long-term investor, your best bet is not to sell off your investments. And if you have extra cash on hand, now is actually a good time to invest more in the market.
If you’d like to partner with me on your investing goals, visit MakingMoneyIsSimple.com to get started with a free consultation.
However, whenever the stock market drops, as it started doing dramatically last week, people can react emotionally and want to sell their investments or stop investing more money to prevent further “losses”.
The reality is you will have an actual loss (versus what is called a “paper loss,” or “a loss only on paper”) IF you sell your investments.
Think of it this way. If you bought a house during the COVID housing bubble and the home values in your neighborhood dropped substantially shortly after purchase, it might be valued at less than you bought it for. But you wouldn’t reasonably think to yourself, “Oh no, the home values dropped, so I should sell my house to prevent further losses!” You would only take a loss IF you immediately sold your home at the lower value. If you instead decide to hold onto the home for the long term, chances are that drop is only temporary, and values will increase over time.
When the stock market drops, this means that the Share Prices have dropped, or, putting it another way, that they are now on sale. This is where ‘buying the dip’ comes into play.
Here’s the math:
# of Shares * Share Price = Account Value
Example: 100 shares * $20/share = $2,000 account value
People tend to freak out after a stock market drop when they log in to their investment accounts because they see that the total Account Value has dropped.However, what’s not totally obvious is that while the number of shares in their portfolio has remained the same, it’s the share prices that have dropped.
Example: 100 shares * $10/share = $1,000 account value
So, while we don’t know what the future will hold, if you are a long-term investor, your best bet is not to sell off your investments. And if you have extra cash on hand, now is actually a good time to invest more in the market.
If you’d like to partner with me on your investing goals, visit MakingMoneyIsSimple.com to get started with a free consultation.