The US has been watching the stock market growth for over a decade as of 2022. Many investors (especially younger ones) have only had the experience of watching their investment portfolios grow. Growth is always the fun part of investing. Who doesn’t like watching their money grow with no additional effort?
When the market is going up, the strategy to be taken with one’s retirement accounts seems obvious. Do nothing and watch it go up! But what happens when the market isn’t going up? What happens when you check your 401K and every day it’s lower? What should the strategy be, then?
The answer is surprisingly unsexy. Do nothing and hold on. The stock market has natural periods of time when it goes down, and portfolios drop in value. At these moments, the single worst thing you can do is sell your stocks and pull your money out prematurely.
The downsides of this strategy are twofold. First, it takes losses that are theoretical and makes them real. When you see your 401K (or any other retirement account) lose value over time, it’s important to remember that these losses have not been actualized yet.
The value of stocks is simply a reflection of the value of the companies in the US public market. Over a long enough time frame, companies always grow in size, which means that if you can ride out the downturn, you will eventually see your portfolio’s value come back up to its previous levels. If you sell your stocks, you make your losses real, meaning they will never rebound.
The second downside is that if you’re under the retirement age (60) in the US, there are penalties for withdrawing money too early from a retirement account such as a 401K. These penalties are steep, and withdrawing money simply because the market is down could lead to you losing even more.
At the end of the day, market downturns are painful. No one likes watching their financial net worth drop each day, but selling prematurely without thought can take a bad situation and make it worse.