The market has been volatile lately, and these moves could cost you.
After surging its way into a bull market over the past year, the S&P 500 (^GSPC 1.26%) has stumbled in recent weeks. The index is currently down by around 4% from its peak in late March, and some investors are beginning to feel pessimistic about the future.
It’s unclear exactly where the market is headed, so even the experts can’t say for certain whether this downturn will continue or if stock prices might quickly rebound. No matter what happens, though, there are two moves to avoid right now.
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1. Pulling your money out of the market
If you’re worried that stocks are going to fall further, it can be tempting to withdraw your money from the market while prices are still relatively high. However, this strategy can do more harm than good.
Again, it’s uncertain what will happen with the market in the near term. While stock prices could continue falling, the market could also surge tomorrow. If you guess where stocks are headed and your guess is wrong, it could be costly.
For example, say you decide to pull your money out of the market right now. If stocks surge, you’ll have missed out on those potential earnings. Then if you decide to reinvest later, you’ll end up buying the same stocks you just sold — this time at higher prices.
2. Waiting for the perfect moment to invest
When the market is volatile, many investors will want to wait for the best time to buy. However, because the market is unpredictable in the short term, there will never be a perfect moment to invest. And the longer you wait, the more time you lose to allow your money to grow.
Time is your most valuable asset when building wealth in the stock market. Oftentimes, buying at a “bad” moment can still help you earn more than if you waited and invested when the market seemed safer.
For example, say you had invested in an S&P 500 index fund in January 2009. The market had one more big drop before bottoming out amid the Great Recession, and at the time, that may have seemed like an awful time to invest. Yet over the next five years, you’d have earned total returns of around 105% — more than doubling your money.
^SPX data by YCharts
Now let’s say that you decided to wait just one year and invested in January 2010. The S&P 500 was well into its bull market at that point, and it may have seemed like a safer time to invest. However, you’d only have earned returns of around 66% by 2014.
^SPX data by YCharts
Time in the market is far more important than timing the market. Even if stock prices drop in the coming weeks or months, giving your money as much time as possible can still help you earn more than investing at the “best” moment.
One smart investing move to make right now
While it may seem counterintuitive, one of the best things you can do right now is ignore the market’s short-term fluctuations. It can be nerve-wracking to invest when the market is shaky, and by ignoring the day-to-day movements, it’s often easier to keep a clearer head.
The market’s long-term performance is far more important than its short-term ups and downs, and historically, it has a flawless track record of recovering from downturns. By simply holding your investments and staying in the market for as long as possible, you’re far more likely to see positive returns over time.
It’s equally important, though, to ensure you’re investing in quality stocks from companies with solid underlying business fundamentals. Strong stocks are far more likely to recover from periods of volatility and experience long-term growth, and the more of these stocks you have in your portfolio, the safer your money will be.
The recent stock market sell-off is nerve-wracking, so if this volatility has you feeling shaken, you’re not alone. But by keeping your money in the market, investing consistently in quality stocks, and maintaining a long-term outlook, you can maximize your long-term earnings while minimizing risk.