After what seemed like a money-printing party in the stock market from mid-2020 to late 2021, last year was a humbling experience for many investors -- including myself.
For all intents and purposes, when referring to the stock market's performance, most experts refer to the S&P 500 (^GSPC -0.01%). The S&P 500 is an index that tracks the 500 largest public U.S. companies. Due to the size and importance of these companies to the economy, the S&P 500 is often used to gauge how the overall stock market is performing.
After dropping more than 18% in 2022, the S&P 500 is now up around 6% year to date (as of May 4), leading some investors to wonder if it's safe to invest now. The short answer is "yes." The longer answer is, "yes, you should be investing regardless of market movements, if you have the means."
Image source: Getty Images.
Try your best to ignore the short term
One of the better traits an investor can possess is patience. When you invest, you shouldn't expect perfectly smooth sailing or immediate results. Would that be nice? Of course. But it shouldn't be the expectation. You should be in it for the long haul.
Part of being a long-term investor is being comfortable with short-term price fluctuations. If you're not, you might want to try because volatility isn't going anywhere. Volatility has been around as long as the stock market, and it'll be around as long as the stock market as we know it exists.
The S&P 500 has had countless bear and bull markets since its inception, and it's endured some of the worst economic events the U.S. has seen. Still, it's managed to be a great long-term investment, historically averaging around 10% annual returns over the long run.
Daily, weekly, monthly, or in some cases, yearly price movements don't matter as much if the long-term results are there.
Don't get in the habit of trying to time the market
I've noticed that when investors ask if it's a good time to invest, it's generally because they want to try to time the market. Either holding off on investing until the market drops or rushing to invest, anticipating the market will rise.
The problem is that nobody can accurately predict what the stock market will do. That goes for me, you, financial institutions on Wall Street with every resource at their disposal, and anybody else. Investors can make educated guesses based on indicators or history, but nobody can say with 100% certainty.
History has shown that the amount of time you're invested is usually more important than trying to time the market.
If you invested $10,000 in the S&P 500 on Dec. 31, 2007, it would've been worth $35,461 on Dec. 31, 2022, if you left it over that span. Here's how that same $10,000 investment would look based on how many of the S&P 500's best days you missed.
| Number of Best Days Missed | Annualized Total Return | Value of $10,000 Investment |
|---|---|---|
| 0 | 8.81% | $35,461 |
| 10 | 3.29% | $16,246 |
| 20 | (0.17%) | $9,748 |
| 30 | (2.93%) | $6,399 |
| 40 | (5.32%) | $4,401 |
Data source: Putnam Investments / Best days defined as largest single-day gains
You don't want to be on the sideline missing out on gains in the name of waiting until the "right" time. And to be fair, you could argue that there's a chance you'll miss out on some of the market's worst days, but that goes back to timing. You don't want to leave it up to chance.
Slow and steady wins the race
Instead of attempting to time the market, taking a consistent approach and maintaining your investments through market ups and downs can be more effective. The goal should be to buy and hold high-quality stocks for the long haul instead of chasing quick profits by timing the market.
One strategy that can help keep you consistent is dollar-cost averaging, which involves investing a fixed amount of money at regular intervals. The intervals you choose aren't as important as making sure it's something you can stick with. For example, you may choose every other Friday if that's your pay schedule.
Dollar-cost averaging has shown it can counter the risks associated with market timing by allowing investors to spread their costs over time, purchasing fewer shares when prices are high and more when prices are low. It's meant to reduce the effects of market volatility and promote sustainable long-term growth.
Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
I've been knee-deep in financial markets for quite a while, and the stock market's recent rollercoaster ride is something I've been tracking closely. Now, let's break down the concepts mentioned in the article.
Firstly, the S&P 500, represented by the symbol ^GSPC, is an index tracking the performance of the 500 largest public U.S. companies. This index is a go-to benchmark for experts when evaluating the overall stock market.
The article touches on the S&P 500's performance in 2022, noting an 18% drop and a subsequent 6% year-to-date increase as of May 4, 2023. It suggests that despite short-term fluctuations, investing remains a sound decision, advocating for a long-term perspective.
The author emphasizes the importance of patience for investors, highlighting the inevitability of market volatility. The S&P 500's historical endurance through bear and bull markets and economic crises is cited, with an average annual return of around 10% over the long run.
A crucial point raised is the futility of trying to time the market. The unpredictability of stock market movements is stressed, backed by the example of a $10,000 investment in the S&P 500 from 2007 to 2022. The data shows that missing the best days in the market significantly impacts returns, emphasizing the benefits of staying consistently invested.
The article suggests an alternative approach—dollar-cost averaging. This strategy involves investing a fixed amount of money at regular intervals, irrespective of market conditions. Dollar-cost averaging aims to mitigate the risks associated with market timing by spreading investment costs over time, ultimately promoting sustainable long-term growth.
To wrap it up, the advice is clear: focus on the long term, stay patient, don't attempt to time the market, and consider strategies like dollar-cost averaging for a steady and effective investment approach.
