Ric Edelman: Want to know how people really lose money when the stock market drops? Well, when you open your monthly statement or check online after the market drops, it's easy to be upset. Feels like your hard-earned money has disappeared and you're afraid that what's left will become even less.
But selling your investments when the market is down is the worst thing you can do. And the worst part is that that's exactly what you do, do. I have got proof too. Data from the Investment Company Institute shows that people deposit money into stock mutual funds when prices are rising and they withdraw their money when prices are falling, they buy high and they sell low. Here is one quick example, the week ending December 5th 2008, that Monday the Dow Jones industrial average fell 680 points, about 7.
7%. That was a pretty big drop and investors got scared, they withdrew $16 billion from their stock funds. Over the next four days the Dow rose 6% and investors added 4 billion to their funds. Had those investors kept their entire 16 billion in the stock market they would've recovered almost all the money over the next four days, instead, they sold low, locking in a billion-dollar loss.
And then they bought stocks again only after prices went back up, don't buy high and sell low, keep your wits about you, when the stock market experiences a sudden drop or a period of sluggishness, don't give in to fear, stay focused on your goals and remember that tolerating occasional declines is part of successful investing.