Should you sell investments in your brokerage account during a recession? This is what Ramit Sethi says
You don’t want to make the wrong choice.
- Many financial experts fear that a recession is imminent.
- It’s important not to make rash moves in your brokerage account when the going gets tough.
- Focus on your long-term investment goals and weather the potential storm, and you might be better off on the other side.
Is the United States Heading for a Recession? At this point, many experts seem to think so.
The Federal Reserve raised interest rates in an effort to slow the pace of inflation. In doing so, it drives up the cost of borrowing, which impacts everything from car loans to credit card interest rates.
The Fed wanna consumers to worry about the high cost of borrowing to the point of cutting spending. This is really the only way to reduce the gap between supply and demand that has driven inflation up.
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But the Fed could end up overdoing it. If he continues to raise interest rates aggressively, consumer spending could decline quickly and to a more extreme degree than expected. This, in turn, could fuel a recession and lead to widespread unemployment.
If a recession hits, it can be a stressful thing to experience as an investor. But should you start selling investments during a recession? Financial guru Ramit Sethi says that’s a definite no.
Stay focused on the big picture
It’s easy to see why you might want to sell investments when economic conditions deteriorate. If the economy deteriorates, the stock market could follow. A brokerage account balance of $25,000 could easily be reduced to $15,000 during an economic downturn.
But one thing you need to remember is that in a situation like this you are only considering a hypothetical loss – not official. And if you leave your brokerage account alone, you’ll give it a chance to recoup its value once the stock market recovers.
In fact, Sethi specifically says in her blog that if a recession hits, the best response is, “Don’t sell investments and stay the course.” The market, he explains, has the potential to fluctuate, but over time it tends to increase by around 7-8% per year.
Now, that 7% to 8% average return represents years where the market is underperforming. And in the past, the stock market has definitely found itself in the red.
But over the long term, the stock market tends to reward investors who stick with it. And so, if you don’t sell your investments during a recession, you’ll give yourself a chance to profit once the market recovers.
In fact, some of the strongest periods of stock market performance have followed long periods of decline. Keep this in mind before selling.
Plus, if you’re investing for a distant milestone like retirement, there’s really no reason to rush to cash out your investments. After all, if you don’t need that money right away, why not just lay still and let things play out?
Try not to panic
If a recession hits, the value of your brokerage account could decline. This is a reality you will have to face. But if you do your best not to panic when it happens, you’ll put yourself in a better position to weather the storm and come out unscathed.
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