Watching the value of an ETF decline can be unsettling, especially if you are new to investing. After several weeks or months of falling prices, one question naturally comes to mind: Should I sell before I lose even more money?
In many cases, the answer is no.
Temporary declines are a normal part of investing in financial markets. Selling in a panic can actually turn a temporary decline into a permanent loss and is one of the most common mistakes made by inexperienced investors.
Here is what you should consider when your ETF loses value.
In Summary
A decline in an ETF is normal and is part of investing.
A market loss only becomes permanent when you sell your investment.
If your original investment strategy has not changed, holding your ETF may often make more sense than selling during a downturn.
Market declines can create opportunities for investors who invest regularly.
Selling may make sense if your financial situation, investment horizon or strategy has genuinely changed.
Why Is Your ETF Falling?
An ETF generally tracks the performance of an underlying index or basket of assets. When that market falls, the ETF will normally fall as well.
That does not necessarily mean that something is wrong with the ETF. It may simply be doing exactly what it was designed to do: follow the market it tracks.
Financial markets fluctuate constantly because of numerous factors, including:
Economic slowdowns
Changes in interest rates
Inflation
Geopolitical tensions
Disappointing corporate earnings
Financial crises
Major economic or health shocks
Periods of strong growth are therefore naturally followed by corrections and periods of weakness.
For example, a broadly diversified global equity ETF can experience significant declines during major market corrections. Historically, however, global stock markets have also recovered from numerous downturns and eventually reached new highs.
This is one reason why ETFs designed for long-term investing should generally be evaluated over a long investment horizon rather than judged by their performance over a few weeks or months.
A Falling ETF Does Not Necessarily Mean You Have Lost Your Money
When the value of your ETF declines, the value of your investment account falls as well. However, the loss is not necessarily permanent.
Suppose you bought an ETF for $10,000 and its value subsequently falls by 15%. Your investment would then be worth around $8,500.
The decline is a paper loss as long as you continue to hold the investment. If the ETF later recovers, the value of your investment can rise again.
The situation changes when you sell.
By selling at a lower price, you turn the decline into a realized loss. If you then wait for the market to recover before investing again, you may miss part or all of the rebound.
This is why emotional decisions during market downturns can be particularly damaging.
Financial Markets Have Always Experienced Downturns
Stock markets do not move upward in a straight line.
Over the past several decades, investors have experienced numerous corrections and major market crashes, including the 2008 financial crisis, the sharp market decline during the COVID-19 pandemic in 2020, and the significant correction in 2022 as inflation surged and interest rates increased.
These events were very different from one another, but they shared one characteristic: markets experienced periods of severe stress.
Historically, major stock markets have eventually recovered from many of these downturns, although the recovery period can vary significantly.
That is why investing in diversified ETFs generally requires patience. A long-term investor needs to be prepared for periods when the value of their portfolio falls substantially.
A Market Decline Can Even Create an Opportunity
For investors who contribute a fixed amount regularly, falling prices can have an unexpected advantage.
This approach is often called dollar-cost averaging (DCA).
Imagine that you invest $200 every month.
If your ETF costs $100 per share, your $200 contribution buys 2 shares.
If the ETF falls to $80, the same $200 buys 2.5 shares.
You are therefore purchasing more shares when prices are lower.
If the market subsequently recovers, those additional shares can also benefit from the recovery.
Regular investing can therefore help reduce the risk of investing a large amount at a single unfavorable moment and can encourage investors to maintain discipline during periods of market volatility.
So, Should You Sell Your ETF?
There is no universal answer. The decision depends on why you bought the ETF in the first place.
If your investment strategy remains unchanged, your financial situation is stable and you still have a long-term investment horizon, a temporary market decline may not be a sufficient reason to sell.
On the other hand, selling or changing your investment strategy may be reasonable if your circumstances have fundamentally changed.
For example, you may need the money sooner than expected, your risk tolerance may have changed, or the ETF may no longer fit your investment objectives.
The important point is to avoid making the decision simply because the market is falling.
The Biggest Mistake Can Be Selling Out of Fear
One of the most difficult aspects of investing is psychological.
When markets fall sharply, investors can become worried that the decline will continue indefinitely. That fear can encourage them to sell precisely when markets are under pressure.
But predicting the exact bottom of a market is extremely difficult.
An investor who sells after a substantial decline then faces another difficult decision: when should they buy again?
Waiting for markets to feel safe again can mean waiting until prices have already recovered significantly.
For long-term investors, maintaining a clearly defined strategy can therefore be more effective than attempting to predict every market movement.
Before Selling, Ask Yourself Three Questions
Before selling a falling ETF, consider these questions:
1. Has my investment strategy changed?
If the original reasons for owning the ETF are still valid, a temporary decline may not change the long-term outlook.
2. Do I actually need the money soon?
Money needed in the near future generally should not depend heavily on the short-term performance of stock markets.
3. Am I selling because of analysis or fear?
If the main reason is simply that the ETF has fallen and you are afraid it will fall further, it may be worth stepping back before making a decision.
The Bottom Line
Seeing your ETF decline can be uncomfortable, but market volatility is a normal part of investing.
For investors with a long-term strategy, diversified ETFs and regular contributions can help put short-term market fluctuations into perspective. A temporary decline does not automatically mean that an investment strategy has failed.
The key is to distinguish between a change in your investment fundamentals and a normal market correction.
If your financial goals, investment horizon and strategy remain the same, patience may be more valuable than reacting emotionally to a temporary decline.
Source: Test-Achats – My ETF Is Falling: Should I Sell or Wait?
