Stay the Course: Why Panicking in a Bear Market Could Cost You

I get it, Canadians have seen their portfolios drop on numerous occasions in the last few years. But honestly, don’t panic! Do this instead.

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First off, I get it. There’s definitely a reason for many people to sell off investments if it’s the difference between being invested, and legitimate survival. Costs have increased, interest rates have risen, and you need the cash. So before I get into this article, I do certainly admit there are times when you need to take out the cash.

But overall, if you don’t need your investments, don’t sell during a bear market! The old saying still holds true to buy low, and sell high. Yet to achieve ultimate heights, you’re going to want to invest long term. So here is what could happen if you don’t.

Missed opportunities

Panic selling during a bear market can have huge costs to your overall portfolio. For instance, your realized returns could turn into realized losses. Investors may end up selling at a price lower than from when they purchased shares, creating a loss out of fear rather than data.

Those losses are permanent, and can also mean you’re missing out on future opportunities. In fact, to bring down your average share price, it’s arguably better to buy more shares. Not sell them off. Then, when the market recovers, you’ll see that your returns get back in the black far sooner.

And once you’ve sold for a loss, that money is gone. You can’t simply get back into the market and reinvest, because that money isn’t coming back. So instead, you’ve lost out on that capital and the returns that would have come with it.

Undermining your goals

Furthermore, if you’re panic selling during a bear market, there are other ways that you’re undermining your goals. This includes your actual goals such as retirement or saving for your wedding, ruining your future financial stability based on present fears.

It also means your perfectly planned out porfolio will lose diversification. You’ve identified the stocks you want to be invested in, the exchange-traded funds (ETF), all of it. Now, that’s out the window because of fear during a bear market.

And there’s actual costs associated to this as well. You need to pay for a transaction cost, brokerage fees, and taxes if not using a tax-free account. Never mind the emotional and psychological impact of these decisions, making you feel as if you’ll never achieve your long-term goals.

Get defensive

So instead of considering a sell off of your stocks during a bear market, stay the course. The market falls every now and again, but overall it climbs back up. That being said, it’s not a time to get into growth stocks or the next big thing. Instead, consider a defensive stock such as Dollarama (TSX:DOL).

Dollarama stock has had a strong year as consumers continue to go to the retailer for lower cost items. Yet shares came down recently, offering a deal, as the company stated it will need to increase the costs of some items. That being said, these items will still remain lower in price compared to most retailers.

Which is why Dollarama stock does so well. It sees growth during downturns from consumers looking for cheap items. It sees growth when consumers later on have more cash on hand. And then there’s expansion through store openings and acquisitions. So certainly consider it if you’re fearful these days, and want more growth and fewer losses. Just whatever you do, don’t panic sell during this bear market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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