Q: It seems like the stock market just went crazy. The Dow dropped 1,300 points in two days, and then rebounded sharply a few days later. Should I keep my money on the sidelines until the volatility wanes?
From a long-term perspective, it's not a great idea to wait "until the volatility wanes," or for any other type of action to occur.
The reason is that it's impossible to time the market with any level of accuracy. Sure, the Dow could plunge 2,000 points next week, but if earnings season looks good, it could shoot upward by a four-figure amount just as easily.
If you're a long-term investor, the most important thing is to invest in high-quality stocks and hold on for the long haul.
Most market gains are concentrated in a relatively small number of trading days. By leaving your money on the sidelines, you could potentially deprive yourself of these crucial returns.
Consider this: If you bought an S&P 500 index fund in 1998 and held it until the end of 2017, you'd have achieved a 301% total return. However, if you had missed just the five best days in that period, your total return would drop to 66%. If you missed the 20 best days in those two decades, your total return would be just 26%.
In short, it's important to ride out the rocky times to be sure you don't miss the best times.
Plus, keep in mind that the recent volatility really isn't all that bad from a historical perspective. In fact, the recent 832-point drop in one day wasn't even in the all-time top 20 in terms of percentage. Market corrections and periodic volatility are components of a healthy stock market and shouldn't affect your long-term investment strategy.