Real investors don’t panic. Well, sometimes they do. Market movements are often sensationalized and price drops can be jangling on anybody’s nerves. You’ve seen the headlines before and you’ll see them again: “Panic Selling Hits Wall Street.”
When your stomach churns as your portfolio’s value drops, remember your commitment to long-term investment goals. Easier said then done? Not really. Try these six remedies.
Remedy 1: Review your investments. Why did you buy the stock or fund in the first place? Check to see if the fundamentals have changed. Do they prompt a wise decision to sell or is the overwhelming evidence to keep holding?
Remedy 2: Look to the future. If the drop was sparked by some disappointing news, determine if the effects will endure beyond the current quarter. Try to determine for how long.
Remedy 3: Weigh the upside against the downside. Is the stock likely to regain or even surpass its previous levels? Will you regret selling it or will your losses expand if you hold onto it?
Remedy 4: Calculate the fees and taxes if you sell. Taxes will be higher, of course, if you’ve held the stock less than a year and are subject to short-term capital gains taxes.
Or suppose you own a stock that’s currently down and you want to unload it so you can use the tax loss to offset capital gains from more successful investments. Watch out for the “wash sale” rules if you think a stock will recover enough to buy it back within 30 days of the sale. You won’t be able to deduct the loss in the year of the trade. Instead, it has to be added to your tax basis and deducted when you sell the new shares.
Remedy 5: Consider what you’ll do with the money. You may have to do as much research to find a promising replacement investment as you did to find the original stock or fund. You may not be able to buy back in at, or below, your sell price and a replacement may have to make even more gains to cover your losses.
Remedy 6: Look for reassurance. Call your financial advisor for moral support. Or get some perspective by checking financial publications or the Internet. The point is that if you sell a stock during a temporary downturn, you could miss the rebound and have to buy it back at a higher price. Or you might not be able to get back in at all if you’re in a mutual fund that closes after you sell.
Tip: If you do decide to bail out, consider selling just part of your holding. That will keep your options open.
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