Investing for a long-term goal, such as retirement, requires a sound strategy. All too often, people make investment decisions based on current market conditions and recent changes. That approach can backfire. Youll generally be better off if you decide on a long-term strategy and stay the course.
Stocks Usually Do Well Over Time
Its common for individual stocks and the stock market as a whole to experience wide swings. That can make investors nervous, but its a normal process.
Although the stock market goes up and down, over a period of decades, it tends to follow an upward trajectory. Even accounting for periods of significant economic decline, if you look at the big picture, stocks tend to perform well over the long term. If you invest in stocks and hold onto them for several years or decades, you will most likely see a substantial return.
Reacting to Market Fluctuations Can Backfire
Investors often get worried when the stock market dips or a particular company that they own stock in is struggling. They sometimes think that it will be better to sell stocks before things get worse.
When people try to time the market, its hard to get things right because there are so many factors at play. Investors have limited information, and circumstances can quickly change. When investors sell stocks during a market downturn, they typically earn less overall than they would have earned by staying invested and waiting for the market to rebound.
Making Emotional Decisions Can Cost You
If you get nervous when the market is in decline, you may sell stocks when the price is falling and get less than you initially paid for them. When the market begins to improve, you may decide to buy back stocks and pay more than you sold them for previously. You would be better off just holding onto those stocks and riding out the storm.
If you sell stocks, you will have to pay taxes. Your tax rate will depend on how long you owned the stocks and your income tax bracket. You can also incur fees when you sell and buy stocks. All of those costs can eat away at your investment portfolios balance. If you stay invested, on the other hand, you can earn dividends and reinvest them to grow your nest egg.
Get Financial Planning Advice
Your individual investing strategy will depend on your goal, how much time you have available to invest, how comfortable you are with risk and other personal factors. If you need advice on how to save for retirement or another goal, consult a financial planning professional.
Published with permission from RISMedia.