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 1.02%). 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.
