Plenty of investors may be feeling worried about the stock market volatility we've experienced in the last few months. As the chart below shows, S&P/ASX 200 Index (ASX: XJO) shares have taken a dive since mid-February.
It's normal for share prices to go through ups and downs. That's why the stock market is riskier than holding cash. And it's (normal) human nature to want to protect ourselves from pain when there's danger lurking.
But is it the right call to sell if we're scared?
Wealth manager Canaccord Genuity has some wise advice on why it could be good to stay invested.
Long-term growth potential
The wealth manager noted that, historically, "financial markets have demonstrated resilience and the ability to rebound from economic downturns".
It's expected that we'll see market crashes and recessions, but they are "typically followed by periods of recovery and growth", according to Canaccord Genuity.
Over the ultra-long term, the stock market has outpaced the rate of inflation and provided pleasing returns. The wealth manager pointed out that we can continue to "harness the power of compound interest, which can significantly multiply your initial investments over time, giving them the potential to grow exponentially over the long term."
While cash (in a good savings account) is offering higher returns than what we've seen in the past 15 years, it is barely keeping up with inflation.
Timing the market is very challenging
It can be very difficult to try to time when to move to cash during a bear market and then buy again when the stock market is recovering.
The wealth manager pointed out an investor could end up selling during a dip and then miss out on subsequent gains by staying in cash.
The recovery of the share market could seem random and premature, but we could miss out on the early/easy gains by being too conservative. Other investors may not let those bargains sit there for long.
Tax
One significant reason not to sell during the stock market decline could be tax considerations.
Selling activates a capital gains tax event – if the investor has made a gain, then some of the profits may be lost to tax. Staying invested (in good, long-term shares) means deferring that tax for another tax year and allowing that larger investment value to continue compounding.
As investors, we're aiming for the strongest after-tax returns. Selling prematurely just because of some volatility may mean a suboptimal result for returns.
