The S&P 500 is approximately 18% down from its peak, producing a crummy 2022 for most investors. A down market can mess with your head; a dozen questions can run through your mind. Do you pull your money out of the market? Do you keep buying? When will the market turn around?
If you look hard enough, you'll find that everyone has a different opinion for every question you could ask. Ultimately, nobody can know what the market will do and when; the great Peter Lynch once said that "if you spend 13 minutes a year on economics, you've wasted ten minutes." Instead, focus on these things you can control, and you'll feel comfortable investing in the stock market, no matter if it's up or down.
Investing with patience
Figuring out when the stock market will top or bottom is consistently one of the hottest talking points on Wall Street, yet it's a question with no firm answer. A stock's peak or bottom is often only apparent in hindsight, despite what some people might tell you. Think about it; if someone could time the tops and bottoms, they would be the world's richest person, not entrepreneurs like Elon Musk or investors with decades-long investing careers like Warren Buffett.
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But you can control how you deploy your money into the market. Consider using a dollar-cost averaging strategy for any funds or stocks you add to your portfolio. Dollar-cost averaging is when you build a position by slowly buying shares over time. Hypothetically, let's say you want to own 100 shares of XYZ stock; you would buy slowly over time, perhaps buying five shares every month until you have 100 shares.
It's a great strategy because it ensures you don't jump in with two feet at the wrong time. If the stock keeps declining after your first purchases, you'll lower your average cost by slowly buying more as the share price keeps falling. If the stock goes up, great! That means you're already buying shares as the price starts climbing. It takes the bad habit of timing the market out of the equation.
Know your risk tolerance
Not knowing what you're signing up for is a big mistake investors sometimes make. You have to understand the risk and volatility behind your investments. For example, the S&P 500 is down 18% from its high, but if you hold a bunch of small and mid-cap growth stocks, they might be down 50% to 90% from their highs right now.
Diversified investment tools like index funds and exchange-traded funds (ETFs) are usually less volatile than individual stocks. For individual stocks, the larger, more established companies often have less extreme highs and lows than smaller, less-proven growth stocks. Depending on sentiment, investors may flock to one type of stock or another. Euphoric investors may pile into growth stocks, and fearful investors may look to less volatile investments.
You can look at a stock's beta to see how it has historically traded relative to the broader market. Building a portfolio that doesn't exceed your risk tolerance will help you keep a cool head and make smarter decisions when stuff inevitably hits the fan.
Keep building brick by brick
If you can manage it, having a continuous stream of new money coming into your portfolio can help you maintain a long-term perspective. It could cloud your judgment and decision-making if you have a certain amount of capital and feel like it's all you'll ever have.
Consistently adding money can help fuel a dollar-cost average strategy and give you the comfort that a single decision probably won't make or break your long-term returns. That helps explain why adding new savings regularly is the third core tenet of The Motley Fool's investing approach.
If you do the homework to identify the suitable investments for your portfolio and focus on things you can control, like how much money you invest and when, and investing in a way that works with your risk tolerance, you're setting yourself up for long-term success in the market.
