At the time of this writing, the S&P 500 (the stock market index comprised of the 500 largest publicly traded US firms) has increased by 12.5% over the past 12 months. This annual return beats the historical annual average of roughly 10%, which may lead some people to think that now is a good time to invest in the market. You want to get in while it’s hot, right? Well, not exactly.
In fact, you might remember that trying to time the market is a losing strategy. Whether you are someone who only invests passively via index funds like us, or is actively day trading, you'll want to keep the same principles in mind.
The stock market has periodic cycles where it fluctuates between going up and down. This is normal. We expect the broader economy (and stock market) to go through a recession every 5-10 years. We obviously don’t like to see our investments lose value during recessions. No one does. But history shows that the markets will recover and our investments will continue to grow over the long term.
Unless you’re able to zoom into the future like Marty McFly from Back To The Future, you can’t expect to predict on which days the market will go up or down. At least not consistently over an extended period of time. Let's face it, if you could make that prediction, you’d be reading this from your yacht in Monaco.
Should I Sell When The Market Is Up?
Selling when the market is growing will lead you to lose out on capital appreciation. Most of the time, it only makes sense to sell part of your portfolio if you need to rebalance as part of your asset allocation strategy. If you are like us and believe in the power of index funds (and we think you should) then you’re likely not trying to regularly buy and sell investments, as the trading commissions will eat away at your profits.
But What If This Is The Peak? Don’t I Want To Buy Low And Sell High?
In an ideal world, buying low and selling high would be the optimal strategy. Sadly, we aren’t fortune tellers, and neither are you. Therefore, timing the market is a losing strategy. Predicting how the market will move consistently is basically impossible if this isn’t your full-time job. Heck, even most professional money managers can’t consistently beat the market. Actively picking stocks is a full-time job, so unless this is your full-time job, you’re bound to underperform the market average in the long-run.
Should I Hold And Continue Riding the Bull Market?
Holding may seem like a bad idea if you think you might be at the peak of the market. Surely, you should get out before the next market correction (drop), right? No! This line of thinking is flawed because you’ll never know when you’re actually at the peak. Between the commissions you'll pay to buy and sell, and your less than perfect timing, you'll end up doing worse than if you had just held onto your investments. You have to remember that the markets move up and down in unpredictable cycles. You need to maintain a long-term view.
You might be nervous to buy more and may want to just continue to hold steady. Maybe you feel that another decline is around the corner and you would feel more comfortable just sitting on the sidelines a little longer and waiting it out. Honestly, there are worse decisions you could make, but that doesn't mean it's the right decision.
Should I Buy More To Continue To Earn Awesome Returns?
Buying more than you planned for is another option. Obviously, the ideal time to invest is at the lowest point of the cycle. The problem? No one knows when a bear market has truly hit bottom and will start to grow again. For this reason, we again recommend against trying to time the market. Did we mention that trying to make the market is a rookie mistake? Once you take investment fees into account, trying to beat the market is a fool’s errand.
This means that you should buy and invest when you have money, regardless of where you think the market will move. In fact, you can set up regular recurring deposits into your Roth IRA, if you’d rather not think about it. Another idea is to invest when you have leftover money at the end of the month from your awesome budgeting skills!
Ultimately, you need to stick to your long-term investment plan. Investing for retirement shouldn’t make you lose sleep at night! Making an investing plan and sticking to it is critical to avoid that feeling of having to “make the right decision.” Don’t make decisions based on your emotions when you see the market fluctuating.
If your investing plan says to invest $200 every month, then invest those $200 regardless of what the market is doing. If looking at your investments makes you anxious, then don’t check them regularly! It’s okay to just take a look once every couple of months. Just trust your plan and know that investing is never the wrong answer when it comes to saving for retirement. Especially when you are young and have considerable runway ahead of you.
Your appetite and attitude toward risk should absolutely play a role in your investing, but NOT in the timing of your investments. Picking stocks and investments is NOT your full time job, so don’t focus on beating the market. You'll only be worse off.
So If I Shouldn’t Time The Market, How Will My Investing Reflect My Risk Profile?
Asset Allocation! The mix of stocks (via index funds) and bonds (also via index funds) is what will determine how much risk you are taking with your investments. Don't try to time the market to avoid losing money when you think the market will drop. The reason is that you actually don’t have a clue when the market will drop, and the trading fees and sub-optimal timing will kill your returns. If you have gotten lucky before, it’s important to realize that it was simply luck. Anyone can get lucky a few times. Don't be fooled.
Do you have the discipline to stick to your game plan when the market seems to keep going up?
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