Avoiding Wealth Destruction: the dangers of selling low destroys wealth. When the stock market dips, corrects, or turns down, and panicked investors sell at the bottom, wealth is destroyed. That happened when Mike suffered a loss after chasing the next big stock market winner. He felt like a loser by following the social media herd to another investment failure that compounded his frustration by selling at the bottom. That move can dig investors into a financial hole. But it does not have to be that way.
Furthermore, No-Worry Investors achieve superior investment results by not selling at the bottom. Additionally, that means being well-prepared to turn dips and corrections into money-making opportunities. See how Mike left the losing herd behind, stopped his frustrations, and learned how to turn market bottoms into wealth-building opportunities. This is something you can do this too!
Be "fearful when others are greedy, and greedy when others are fearful."
Warren Buffett
More on Warren Buffett here.
What Mike learned from Avoiding Wealth Destruction: the dangers of selling low destroys wealth
This lesson explains how selling low destroys wealth and how no-worry investors manage themselves and their investments in market bottoms. Links at the end provide access to related lessons. This lesson includes the following:
The social media herd taught Mike some hard, expensive lessons about how selling low destroys wealth
Mike's Struggle with Chasing Stock Market Gains
Mike chased stock market gains but was always one step behind. He'd hear about the next big thing from social media contacts and get in but would panic sell when the prices dipped. After repeating that pattern, Mike started feeling hopeless about his financial future when he saw his stock market update.
Always Out of Step and Behind the Market
Mike always seemed to be out of step and behind the market. Whenever a hot new stock came out, everyone else got in first. He had suffered several losses and was determined not to keep repeating those mistakes.
Discovering the Power of Turning Dips into Opportunities
After a friend told him about turning dips and corrections into opportunities to make money, Mike decided to research online and talk with experienced investors. During this process, he learned about White Top Investor and No-Worry Investing.
Learning to Prepare for Stock Market Downturns
He set about learning how to be prepared for stock market downturns. First, Mike used White Top Investor and the no-worry investor lessons to start on his way to investment success. Additionally, talking to more experienced investors with long-term track records, he learned they always seemed to know how to make and retain money.
The Key to Success: Embracing Market Dips
He learned they didn't worry when stocks dipped or corrected because they knew how to turn those dips into money-making opportunities! That stopped Mike from selling when the markets dipped or corrected. In other words, he stopped selling low!
A New Perspective: Seeing Dips as Market Sales
Instead, he began to think of dips as the days stock markets had lower price sales. As he learned more about White Top Investor and no-worry investing, he realized this simple approach could lead him toward financial success if he remained patient and alert during any market dips or corrections.
Mike's Mission: Mastering the Art of Investing to become a No-Worry Investor
Mike realized he could use these same strategies if he just took the time to learn them properly. That became his mission: find out everything there was to know about investing in stocks so that he could make profitable trades even during downturns!
Immersing in Financial Knowledge
He followed the suggestions and read books and articles on finance and investing. His research paid off!
Profiting from Market Downturns
Since Mike knew what moves made financial sense every time the markets dropped or corrected, it felt like Christmas morning for him—instead of selling at a loss like before. While not always easy, his account balance steadily grew faster than ever!
Riding Out the Downturns for Long-Term Gains
The biggest payoff came when Mike rode his long-term investments through the next downturn he experienced. He had an excellent return for his efforts. His account hit new heights and continued to grow.
Freedom from Emotional Investing
Most importantly, Mike freed himself from the emotional roller coaster ride, sleepless nights, and panicked selling. Now he plays dips like opportunities to buy stocks on sale! He learned to research before investing and developed strategies to help him decide when it might be better to buy rather than sell.
The Power of Knowledge and Confidence
His newfound knowledge and confidence helped him make intelligent investment decisions and take advantage of dips rather than running away from them! As seems to happen for wise investors, luck favored Mike with more profitable opportunities.
FAQs Mike and other investors asked about Avoiding Wealth Destruction: the dangers of selling low destroys wealth
These questions and answers about selling at market lows have overlapping answers. Therefore, the answers can help investors better understand how stock markets, investing, and money-making interrelate.
Why do people sell low?
In most cases, people sell low to end the pain of financial loss.
Financial loss, uncertainty, fear, and crowd psychology cause anxious or uninformed people to sell, even when doing so can result in severe portfolio damage.
People who become informed, knowledgeable investors can avoid this financially painful mistake.
Should you buy and sell low?
Any form of timing the market is a high-risk wealth trap that No-Worry Investors avoid. Instead, experienced successful investors favor long-term investment strategies.
While market timing appeals to some traders using a version of a buy low, sell high strategy, it is essential to know that such schemes can only work well in strongly trending favorable market conditions.
In the long history of stock markets, there has never been a consistently successful market timing scheme. So, avoid these strategies and use straightforward ones with a record of making money.
Why is selling low a bad idea?
Investors who sell during downturns lock in permanent losses that harm their financial future. Markets can be volatile, with ups and downs. However, over time, markets always recover and rise higher. Therefore, investors who sell at the bottom miss out on the recovery and all future growth.
In contrast, wise investors hold quality investments that align with their long-term goals through market fluctuations. These experienced investors understand the role of emotions in decision-making and the importance of using reliable and productive strategies.
They never attempt to time the market.
Why not sell when the market is down?
Take the trash out in downturns, but keep the treasure because every time the stock market goes down, it returns! Selling at market bottoms locks in losses and eliminates any chance of recovery.
Instead, investors holding quality stocks can avoid losing by waiting until markets turn positive. That keeps them well-positioned for the inevitable ride higher.
Yes, eliminate mistakes and exit risky trades and speculations in a downturn, as the worst never recover. However, hold high-quality stocks through a downturn because they always recover. That's a long-term wealth-builder secret to success!
Investors who avoid selling at market bottoms recover losses and benefit from subsequent market upswings to continue building wealth.
Why is it important to buy low and sell high?
This trading question is of little interest to investors who instead patiently ride income streams and equity growth to wealth.
For traders, buying low and selling high has the obvious benefit of making money! While many stocks are at low prices, buying the right ones that will soon move higher takes knowledge, skill, and time.
But too often, when markets dip, inexperienced hands may impulsively sell, take a loss, and be comforted by avoiding further emotional discomfort!
Should I sell when a stock price falls?
Investors, traders, or speculators should have the answer in their investment plan.
Furthermore, long-term investors hold quality stocks with histories of regular dividend increases. They enjoy dividends and price recovery from market dips and may choose to buy more shares when the price falls.
On the other hand, traders who aim to profit from price movements disregard dividends and prefer higher prices, except for those who sell short. Moreover, experienced traders set price movement rules to save time, emotion, and capital by selling if prices drop 7% or more in all market situations.
Finally, speculators immediately go to cash or sell short in a downturn when the market or a stock price moves against them.
Why Market Timing Doesn't Work
Market timing, the attempt to buy or sell assets based on future price predictions, is a Don Quixote windmill too far or an actual mission impossible for Tom Cruise. However, there are several reasons market timing doesn't work:
Market Efficiency
While not perfect, financial markets tend to be efficient. Asset prices reflect known information and quickly adjust to new information.
Human Psychology
Investors are often influenced by psychological biases, such as overconfidence, fear, and greed, which can lead to poor decision-making. The mismanagement of these biases can cause investors to buy high and sell low rather than the reverse, emphasizing the need for investors to learn how to manage their emotions.
High Transaction Costs
Timing schemes involve more frequent trading, which increases transaction costs, including brokerage fees, taxes, and the bid-ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. Any cost increase can significantly reduce overall returns.
Timing Accuracy
Accurately predicting the ideal moments to enter and exit the market has never been accomplished in the history of markets. Missing even a few of the market's best days can significantly impact overall returns.
Opportunity Cost
Staying out of the market while waiting for the perfect investment time misses opportunities. Long periods of sitting on cash mean missing out on potential market gains.
Volatility and Uncertainty
Various factors, such as economic data, geopolitical events, market sentiment, and everything else, influence markets. As a consequence, the ever-changing complexity makes consistent predictions of short-term market movements impossible.
Historical Performance
Numerous studies show that professional investors and fund managers struggle to outperform the market through timing strategies. In contrast, unlike timing strategies, multiple long-term investing strategies, such as dollar-cost averaging, index fund investing, or Index-Plus Layered Portfolio Strategy, and diversification, consistently produce good performance records.
Market Anomalies
Unexpected events, such as political instability, natural disasters, or sudden economic shifts, can dramatically affect market prices in unpredictable ways. As a result, making market timing unreliable due to its susceptibility to these external factors.
Market Timing Consequences to Consider
Overall, the difficulty of accurately predicting market movements and associated costs and risks makes market timing an ineffective investment strategy. Instead, well-founded long-term strategies, such as dollar-cost averaging, index fund investing, or Index-Plus Layered Portfolio Strategy, and diversification, are far better for wealth-building over time. Your investment success is not about timing the market, but it is time in the market that matters.
Selling low destroys wealth
Knowing and understanding how to cope with market bottoms is an essential no-worry investor skill. Being comfortable with market dips, bottoms, and downturns improves investment knowledge and performance. Make this part of your investment and portfolio management, and you gain another no-worry investor skill!
Each falling market dip or correction is a test for investors. But selling low destroys wealth and fails the test. Instead, long-term no-worry investors have done their homework and know how to pass this test and build wealth.
Investors ready for a stock market dip or correction can put more money into their pockets. Investors who understand stock markets can prepare for opportunities that market dips and corrections present and turn adverse market movements into positive investment opportunities.
Experienced, skilled investors think of market bottoms as opportunities for buying, not selling! Ignoring the panic-selling herd that sells at a market bottom protects and grows your wealth.
By looking for opportunities to buy low when markets fall, you can position yourself to benefit from riding the inevitable market recovery. This simple idea works because every time the market falls, it recovers and rises to new highs. That has happened for hundreds of years and will happen next time too.
Why No-Worry Investors don't sell in down markets
No-worry investors don't sell when the market is down but continue focusing on wealth-building, making them seem impervious to market fluctuations. They don't flinch when the stock market takes a nosedive or sell off in a panic.
In downturns, they take out the trash but keep the treasure with their unique perspective on market downturns. While holding quality stocks through a downturn may seem challenging, the compelling reasons these savvy investors choose to stay the course during turbulent markets include:
1. Distinguish Between Trash and Treasure
Not all stocks are created equal. In turbulent times, scrutinize your portfolio to identify underperforming or risky investments that may not recover or have long-term potential. These are your "trash" stocks.
2. Realizing Losses
Selling quality stock during a downturn locks in investment losses and ensures you will miss the recovery. By holding onto your quality investments, you can ride the value rebound.
3. Long-Term Perspective
No-Worry Investors maintain a long-term investment outlook and understand that market downturns are part of investing. Therefore, staying focused on the long-term big-picture strategy avoids the distractions of volatility or short-term fluctuations with little long-term financial impact.
4. Avoiding Emotional Decisions
No-Worry Investors avoid costly mistakes by following a fact-based plan and not panic selling in a fear-driven need to stop the pain of losing.
5. Bargain Hunting Opportunity
Instead of viewing downturns as causes for concern, No-Worry Investors see them as opportunities to buy undervalued stocks at sale prices for greater returns when the market rebounds.
6. Market Timing Cost
No-Worry Investors know that it is impossible to outsmart or time the market. Instead, they avoid the costs and risks of trusting luck by focusing on proven, consistent, sound, and long-term wealth-building strategies.
7. Diversification and Risk Management
No-worry investors understand the importance of diversification in risk management. Therefore, they use different asset classes, sectors, and locations for a well-diversified portfolio that can weather downturns.
8. Historical Perspective
History has shown that the stock market has a long-term upward trend despite periodic downturns and volatility. No-Worry Investors know that periods of recovery and growth follow market downturns. Recognizing that market downturns are temporary, they are ready to withstand short-term fluctuations without panic selling.
No-Worry Investing wisdom includes maintaining composure and perspective during market downturns with a long-term outlook. By avoiding emotional decision-making, investors can seize more investment opportunities.
Should a downturn catch them offside in a bad trade or on the wrong side of a speculative position, they immediately take out the trash but keep the treasure of their quality holdings. These investors continue building diversified, productive, wealth-building portfolios by confidently staying grounded in historical trends.
Investor choice: win, grow, or lose
The buy high, sell low trap never builds wealth but tests your portfolio management skill. It is a mental and emotional test that can be a significant challenge the first time you face it. Although easy to say, passing the test in a sharp correction can be challenging. Rather than reacting in the heat of the moment, be prepared for this test because another test is always coming.
Investors have three choices when stock market prices fall across the board:
- 1Stay to win: Continue collecting dividends
- 2Buy to grow: Stocks on "sale" are portfolio growth opportunities
- 3Sell to lose: Stops pain, loses capital, and locks in losses
Buy high and sell low certainly should never be an acceptable investment strategy. However, the market will test your investing beliefs, behavior, and emotions. When facing this investor pop quiz, what will you do?
Be mentally and emotionally ready, and you will do fine.
Pass the dip test to build wealth
When prices fall, the two wealth builder choices are, stay in or grow. Staying in to collect dividends while waiting for prices to rise again will work. A more aggressive wealth builder can buy more shares at the sale prices. Doing that can add significant upside gains when markets recover.
The poor choice is to sell price dips to lock in losses. That is often a panic response. It does stop the pain of further loss but at the high price of locking in the losses. This approach destroys portfolios and wealth.
Challenging questions wealth-builders can handle
For traders, the risks are higher. And they are greatest when markets or stocks stall or underperform. If not addressed, a stall can grow to become a double-digit investment loss. And the invested funds become "dead money."
Some challenging questions to ask include:
What's the problem?
How did we get here?
What is the cause?
Is it the market, sector, or company?
When a sector is affected, determine what event is behind the change. For example, in the early days of the Covid-19 pandemic, lockdowns spread worldwide resulting in reduced oil consumption as a flood of OPEC oil hit the market. That flood made oil prices plunge.
Do I sell, wait, or buy?
Investors, traders, and speculators have different strategies, plans, and responses. White Top Investor defines investing, trading, and speculating as three distinct approaches to the stock market. Investors always want an income from the market, while traders wish to play long in favorable markets and avoid others, or some sell short when markets present downside opportunities. Speculators are opportunistic traders seeking situations that favor their higher-risk approach.
Income investors sit tight as dividends flow
Investors holding high-quality large dividend payers can securely and comfortably ride their portfolios in all markets. That means investors must have a long-term view and knowledge. Holding quality stocks means they can confidently expect their dividend stream to continue through any downturn. They need to understand and accept that the current value of their equity will decline during market downturns.
Income investors accept the sometimes-sharp decline of equity values in a market decline by knowing that downturns end and equity prices of quality companies recover. That has happened repeatedly over the long history of stock markets.
Traders play markets and ride stocks but not dividends
On the other hand, investors are far more passive in markets. They tend to carefully measure their response and take action in significant market shifts. Traders quickly respond to or act on market changes and generally go to cash or sell short in downturns.
The most successful traders build their trading plans on clear, well-founded rules. For example, sell without exception when a loss hits 7% or more. This easily understood rule saves money and portfolios.
Alternative formulas or selling strategies can quickly become complex. Complexity opens the possibility of a missed signal in the heat and excitement of active trading. Similar to running a red light, a forgotten rule or sign can promptly extract a high price.
So experienced traders keep it simple. After all, losing money is the worst part of being on the wrong side of a trade. But stopping a loss from growing is always the right move. So, in contrast to investors who happily ride dividends through a downturn, traders sell or go short.
Speculators are very market-aware
Speculators are the most aggressive traders in stock markets. Those with a good performance record have excellent market awareness. They will quickly exit and move to cash or change sides on a trade if they think they will make money.
Overall, the best upside performances for speculators come in strong bull markets, however they will play long or sell short in response to what markets do. Usually, speculators sell short or sell out long positions and hold cash during downturns.
Don't wait for breakeven magic to appear.
Worst than losing is hanging onto a loser waiting for breakeven magic to happen. The cold hard truth is that only the wicked loss witch will come. So don't wait. Sell, shake it off, and move on.
Every loss takes an ever more significant recovery.
It is exponentially more challenging to break even as the size of the loss increases. The facts and odds against any such recovery happening in a reasonable time grow larger.
A 10% loss takes an 11% rebound to recover.
A 20% loss takes a 25% rebound to break even.
A 35% loss takes a 54% rebound to break even.
A 50% loss takes a 100% rebound to break even.
By not selling, a bad situation can compound:
- 1You have the loss of a bad investment
- 2You risk losing more.
- 3This dead money harms your portfolio performance.
Instead of waiting while the insidious costs of holding a loser grow, sell. Selling that loser frees up capital that can be put to work making money.
Look at the big picture
To decide what to do, look at the evidence, not emotions, and consider the bigger picture. Consider employment trends, as well as house sales and prices. In addition, ask some basic questions?
Are jobs, sales, and prices going up or down?
Moreover, what do auto sales trends say?
Do you see any growing trend in one direction?
Are trends moving up or down?
Are trends steady in one direction or moving back and forth?
In a previous lesson, we discussed 5 Stock market direction pointers. Key economic indicators keep telling us the financial future looks promising.
For several days, market turmoil, falling stock prices, and dropping indexes tell a different story. Be mindful that there are always falling prices somewhere for something. However, over time stock and market prices have trended up.
Or has something changed? Do current market conditions say something has changed? Could this be the start of a more severe downturn?
Sources of market turmoil
Investors may get unsettled when the market has been down for several days or weeks. That often comes as a reaction to change or fear of change. For years tapering and talk of FED activity have made markets jumpy.
Specific dates can also get markets to show some nerves. Markets frequently react to the end of quarters or end of years. The lesson, Informed investors hear FED market signals discussed being careful about responding to talk about tapering.
See a related lesson, How investors buy dips, which discusses buying the dips.
Traders and market reactions to speculative talk of coming quarter-end tapering by the Fed can result in a choppy market.
A cynic might even enjoy the irony of seeing traders frustrated with choppy markets that they essentially created for themselves!
Avoiding wealth-destroying investment blunders
Avoiding losses is a skill used by successful investors who learn to make sound risk control part of managing stock market investments for long-term wealth building. Risk mitigation avoids common wealth-destroying investment mistakes.
Never invest desperate cash
Only invest cash you can lose. The money you cannot lose comes with a desperate emotional burden that can result in poor trading decisions. It can urge you to sell at the bottom or panic-buy FOMO (Fear Of Missing Out) stocks to avoid losing an opportunity.
Additionally, desperate cash also encourages big bets to seek quick payoffs. That's gambling, not investing, and it can quickly become a buy high, sell low financial horror story.
On the other hand, investing cash that is not needed within the next five years can make investment decisions calm, logical, and good for long-term wealth-building. Then, if markets dip, you can continue your long-term plan without worrying about keeping your home or buying groceries.
If you don't understand it, don't buy
We can't afford an investment we do not understand. Invest only after making informed decisions, or you'll be disadvantaged. There are endless things and companies we know, so we invest in them. They present unending opportunities to build wealth.
Dabbling in awful, confusing, mysterious business models, technology, or financial magic is never okay. No real investment or economic opportunity requires faith to accept.
Margin buys can mean marginal returns
Borrowing money to buy an investment is easy and profitable for the lender! When you borrow from your broker, it is called margin. You pay interest, and your account is convenient collateral. But margin buys are riskier. As a consequence, they have a long history of destroying wealth.
Moreover, margin gives you increased buying power, but the power cuts two ways. Additionally, the more you borrow, the more you pay, and the higher your risk. However, if a trade goes against you, you must deposit more funds to cover any shortfall. Furthermore, you repay the debt when you sell your position. Therefore, it's important to avoid this investment blunder.
Wealth-builders are long-term thinkers
Wealth-builders are comfortable, patient, and disciplined lifetime investors. They are steady, reliable, and persistent but give the get-rich-quick crowd a pass.
Why this lesson matters
Knowing that stock market dips and corrections present opportunities can improve your investing results. In addition, learning how to play stock market dips and corrections can improve investment results.
Lesson takeaways for selling low destroys wealth includes:
Selling low destroys wealth because it locks in substantial losses whenever a falling market dips or corrects to test investors. Now Mike and no-worry investors have learned how to pass this test to produce long-term investment results.
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Links to other course lessons:
Managing Investment Market Risks
Dangerous dividend warning signs Lesson 2
Investor retirement saving dangers Lesson 3
Exotic ETFs blow-up portfolios Lesson 4
Stock scam awareness defense Lesson 5
Best stock scam tips Lesson 6
Bitcoin fraud trust and psychology Lesson 7
Investors hold patient cash Lesson 8
3 Risk or opportunity signals Lesson 9
Option risks, dangers, and opportunities Lesson 10
Cautious look at options Lesson 11
Selling low destroys wealth Lesson 12
FAQ about investment market risks FAQs 480 MR
FAQ about stock scams FAQs 480 SC
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Short story shorting stocks
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