Panic selling during a bear market is accompanied by a high price
After a bull market from mid-2020 to late 2021, the stock market had a humbling 2022, with many big companies and major indices falling well into the double-digit percentage range. It’s easy to get your emotions involved whenever you’re dealing with money, especially when you see the value of your portfolio dropping every day. During bear markets and market downturns, investors may start to panic and sell investments to prevent the value from falling even further, but this is not the right approach to take.
One of the best lessons investors can learn is that downturns are as much a part of the stock market as stocks themselves. If you focus on the long term, however, short-term price movements should not discourage you or cause you to lose sight of your financial goals.
Taxes could add insult to injury
No one likes to lose money – it defeats the purpose of investing. However, it is important to understand that losses in your portfolio are not realized. These unrealized losses only become permanent losses when you decide to sell your shares. If you believe in the long-term potential of your investments, there is no need to sell them and lose money because you panicked when prices fell.
Even if you panic sell your shares for a profit, you could end up adding insult to injury when you factor in the potential tax bill. Imagine you buy 100 shares of Etsy in 2017 at $15 each and has now decided to sell those shares for $80 after seeing the stock price drop almost 60% since the start of the year. Even if you would have made $6,500 in profits, you would still have to pay capital gains taxes on that amount. At a capital gains tax rate of 15% – which many people will pay – this represents a tax reduction of $975.
If this were a situation where you held the stock for a year or less, the tax hit could be even greater, as you would pay your normal tax rate on profits instead of the more favorable rate on capital gains.
Consider the opportunity cost
Not only should you think about the current consequences of panic selling your stocks, but you should also consider potential missed opportunities in the future. While your investments may not perform well in a bear market, that doesn’t mean they won’t rebound and produce excellent long-term returns.
Will all businesses go through tough economic times? Unfortunately no. But history has shown that blue chip companies and major indexes tend to rebound at some point. You don’t want to find yourself selling your investments and then seeing those same stocks surge before your eyes, which could cost you more to buy them back.
From January 2015 to October 2015, walmartShares of fell more than 35%. If someone had sold their shares during that time, they would have missed out on the 120% gain in share price that Walmart has generated since then, even though the retailer’s shares are down 13% since the start of the l ‘year. And that’s just the rise in the stock price – that doesn’t take into account any missed dividend payments during that time.
Selling your stocks in a panic can not only lead to current losses, but also cause you to miss out on future profits. If you’re buying a stock, it should be because you plan to hold it for the long term. Keep this in mind and make short-term decisions that are against your long-term best interests.
Stefon Walters has no position in the stocks mentioned. The Motley Fool holds jobs and recommends Etsy. The Motley Fool has a disclosure policy.