Is it safer to pull your money out of the stock market or keep investing for now?

During periods of market volatility, it’s hard to look away from sensationalized headlines and the uproar on social media.

Amid all the ups and downs, selling off investments to prevent further losses is tempting, but as we’ve learned from previous bear markets, it’s better to stay invested than to cash out.

Here is what to keep in mind.

Stay invested, and lower your average cost.

One advantage of staying in the market during a downturn is the opportunity to buy shares at a lower price.

A popular strategy for purchasing additional shares is dollar-cost averaging. With this approach, you invest the same amount every month, buying some shares low and some higher.

For example, say you’ve committed to investing $500 per month in a specific ETF. When the market is doing well, shares might cost $50 per unit, so you buy ten shares. In a downturn, the price might drop to $35 per share, so your $500 now buys about 14.29 shares.

After two months, you’ve invested $1,000 and own 24.29 shares. Your average cost per share is now approximately $41.18 That’s lower than your first purchase price of $50, because you bought more shares when prices fell. You can do this automatically through pre-authorized contributions from your chequing or savings account.

Investing when prices are low can help increase your returns when the market rebounds. If you were to sell all 24.29 shares when the ETF’s share price rises to $55, you’d receive $1,335.95 – a profit of $335.95 on your initial $1,000 investment.

If you panic and pull your investments, you won’t get the same returns as you would by keeping your automatic contributions.

Time in the market vs. timing the market

Unless you have a crystal ball, it’s impossible to consistently time the market – even for professionals.

Staying invested is generally more profitable than trying to outsmart the market. That’s because while markets can be unpredictable in the short term, they historically have trended upward over time.

In fact, some of the market’s biggest gains occurred after sharp declines. History shows that rebounds often follow after periods of volatility, and missing these key recovery days can make a huge impact on your portfolio’s overall performance. Trying to jump in and out of the market during these periods can be even far riskier than waiting them out.

For instance, over the past decade, the S&P/TSX Composite Index has climbed by 126.86%, with an annualized return of 8.54%. However, if you missed just three of the highest-return days in that market during this period – March 24, 2020 (11.97%), March 13, 2020 (9.72%) and April 6, 2020 (5.12%) – your cumulative return would be significantly reduced.*

Investors who panic and sell when markets plunge are unlikely to jump back in at the precise time necessary to benefit from a rebound.

Reinvesting dividends can quietly power growth.

Many investors aim to buy low and sell high, but one overlooked way to build wealth is through reinvesting dividends. Dividend-paying equity funds and ETFs give a portion of profits back to investors, rewarding them for their continued investment.

You can either pocket the additional cash or reinvest it to buy more shares. Opting for the latter option can help grow your total investment – that’s because those new shares will start earning dividends as well.

This creates a compounding effect, in which your returns begin generating more returns – like a snowball gathering more snow as it rolls downhill. That way, your investments have the potential to grow. The key, however, is patience. The longer you stay invested, the more the value of your portfolio will increase.

Avoid emotional decisions with a plan.

During times of economic and political uncertainty, investor confidence can start to shake.

Fear, anxiety, frustration – and even stronger feelings of hopelessness – can sometimes prompt investors to make rash decisions they’ll later regret.

The best way to avoid emotional reactions, and avoid reacting to the headlines, is to remain focused on your goals.

One effective way to stay on track is through systematic investing, such as pre-authorized contributions. Automatically transferring money from your banking account into your investments can help you weather short-term turbulence and potentially experience long-term gains.

Downturns don’t last – but the benefits of discipline can.

The trick to creating long-term wealth comes down to one simple, albeit boring habit: discipline.

Investors who sit with discomfort and stick to their long-term equity strategy are more likely to recover and even come out ahead.

Those who exit the market too soon, on the other hand, risk locking in losses and losing out on the rebound.

Remember, downturns are temporary. Staying the course is your best bet for long-term success.