Say, for example, you believe a market crash is coming, so you sell all your stocks right now. The market may not crash, though, and stock prices could continue increasing. In that case, you’ve missed out on those potential earnings by selling. And because stock prices have increased, if you decide to reinvest, you’ll end up paying more for your investments than what you sold them for.
In this scenario, you could simply keep your money out of the market indefinitely, since a downturn is bound to occur sooner or later. With that strategy, though, you could potentially miss out on even more earnings.
Say you sold your stocks in March 2020 when the market took a nosedive, for example. If you chose not to reinvest until the market crashed again, you would have missed out on one of the greatest bull markets in history.
Hindsight is always 20/20, and it’s easy to look back on previous market crashes and think about how much money you’d save by selling right before prices dropped. In the moment, though, it’s impossible to know whether the market really is headed toward a crash or not.
