Anybody invested in one of the three main indexes (S&P 500, Nasdaq Composite (^IXIC 0.00%), and Dow Jones) can tell you just how rough 2022 has been. Bear markets can be nerve-racking; there’s no denying that. Nobody likes to see their portfolio dropping, especially after the bull run the stock market had from mid-March 2020 until the end of 2021.
Regardless of how uneasy you feel watching some of your favorite stocks drop, the one thing you don’t want to do is panic and begin selling shares. It might seem like a good idea to stop the bleeding, but you could end up adding insult to injury.
You can’t forget about Uncle Sam
If you decide to panic-sell some of your stocks because of falling prices, you could end up sparking a tax bill. If you’ve held the investments for less than a year, any profits will be taxed at your regular income tax rate. If you’ve held them for a year or more, they’ll be taxed at the more-favorable capital gains rate, depending on your income and filing status.
Let’s imagine you purchased 500 shares of the tech-heavy Fidelity NASDAQ Composite Index ETF (ONEQ 1.13%) in December 2018 for $25 per share ($12,500 total). Over the next 14 months, the index would rise over 45%, bringing your investment to $18,155, but in early 2020, it would plunge because of the pandemic.
If you saw the stock dropping and decided to sell your shares at $35 each, you would have made $5,000 in capital gains. Assuming your income is more than $40,400 ($80,800 if married and filing jointly), you’ll owe at least 15% on the $5,000, creating a $750 tax bill. If you’re in the higher 20% tax bracket, that’ll be a $1,000 tax bill. You never want to forget the tax implications of selling your stocks because it can be costly.
Think past the “right now”
Aside from the present tax bill you could face by selling your shares, doing so also eliminates the potential of any future growth from those shares. Even after its plunge during the Great Recession, the Nasdaq Composite is up over 800% since then — even while being down more than 25% year to date as of July 26, 2022. A $10,000 investment then would be worth over $90,000 now. And that’s not counting the dividend payouts received over that span.
If you have time on your side, the odds are in your favor that major indexes and blue chip stops will eventually find a way to rebound. When you make an investment, you should be comfortable with not touching the investment for the long haul. Warren Buffett once said, “If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.”
You shouldn’t be investing to the point where you’re not leaving enough money for your daily life, so if you’re focused on the long-term returns on an investment (spoiler alert: you should be), you shouldn’t be too discouraged or deterred by short-term price movements. Especially if they cause you to make decisions that go against your long-term interests — like panic-selling. Instead, stay the course and potentially use this as a chance to grab some great stocks at a discount.