A “paper tiger” is a perceived threat that turns out to be harmless. It also describes the loss you may feel when your investment values decline during market downturns. It may feel real, but unless you actually sell a holding when it’s down, the loss is just a mirage.
Let’s explore how to stay out of this jungle. When you invest in stocks or bonds, it doesn’t take long to notice their investment values swing up and down … sometimes wildly. During the upswings, nobody complains! But during the downturns, people get nervous. It feels like you’re losing money.
But it’s not actually a loss. Not unless you sell your holdings.
Say it’s Monday, and you buy 100 shares of a stock (or mutual fund, or ETF) for $1,000, or $10/share. On Wednesday, the share value declines to $8. Your investment is now worth only $800. This frightens you, but you decide to wait and see.
Fortunately, by Friday, the stock rebounds to $12/share. Your investment is now worth $1,200. And importantly, you still own the 100 shares of stock. When the price declined you didn’t lose any shares, or the ability to participate in the next, inevitable market upswing. Over time you hope the share price will climb more often than it drops so, when it is time to sell, you should receive far more than the $1,000 you invested, for real.
What if you instead sold your $1,000 investment for $800? In that case, you’d be $200 poorer, and you would no longer own your shares, so there’d be no opportunity to profit from any price recovery. Whoever bought your 100 shares would be the beneficiary of any future growth.
This same applies to your IRA, 401(k), TSP, etc. Just because the account value temporarily dips doesn’t mean you have lost your investments. They still exist to (hopefully) increase in value at a later date.
There are plenty of reasons to sell holdings, sometimes even at a loss. Reacting in fear during a market decline shouldn’t be one of them. Market declines happen. So do recoveries. Trade according to your personalized financial plan, and you are far less likely to turn paper tigers into real bears.
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