The first half of 2022 was brutal for many popular companies and indexes. The two largest U.S. companies, Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT), are down over 19% and 24% year to date, respectively, as of July 18, and the S&P 500 — which many investors use to gauge how well the broader economy is doing — is down more than 20%.
Even though many great companies and the major indexes have had a rough year, you shouldn’t be discouraged or distracted from your long-term goals. Bear markets are a natural part of the stock market; they’ve happened often in the past, and there’s no reason to think they won’t continue happening in the future.
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Nobody likes seeing their portfolio’s value decrease, but the one thing you don’t want to do in a bear market is get impatient and make short-term moves that go against your long-term interest. It can be costly.
Selling now can stop future gains
If you’re investing in a company for the long term, the plan should be to make consistent investments to increase your position in the stock over time. If you panic-sell shares during a bear market, those are shares that you’re not giving a chance for future growth. Let’s take a look at American Express (NYSE: AXP) (AMEX), for example.
In February 2020, AMEX’s stock price fluctuated within the $130 to $135 range, but by March 20, 2020, the stock had decreased to just above $74.
Let’s imagine you owned 100 shares of AMEX and sold them for $90 each as you saw the stock plunging, pocketing $9,000. Those same 100 shares would be worth over $14,200 as of July 18, 2022, even with AMEX’s stock down more than 15% year to date.
Aside from the potential value missed in a stock price increase, panic-selling your shares can cause you to miss out on dividend payments. With a $0.52 quarterly dividend, those 100 shares could generate $208 in dividend income that could be reinvested into the stock to add to the effects of compound interest. Dividends are a way companies reward investors for holding onto their stock, and if you believe in a company’s long-term potential (which you should if you’re investing in it), you should do just that.
Uncle Sam will need his share
Another consequence of prematurely selling your shares in a bear market is the potential tax bill it could create. If you’ve held a stock for less than a year and sell it, any profits you make will be taxed at your regular income rate. If you’ve held the stock for more than a year, you’ll get …….