After a tumultuous 2022, the stock market has been surging this year. Currently up more than 24% from its lowest point late last year, the S&P 500 has many investors feeling optimistic.
This upswing has also led many experts to declare the beginning of a new bull market, as both the S&P 500 and Nasdaq have increased by more than 20% from their lows. Others, though, note that it may not be an official bull market until these indexes reach new all-time highs.
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Regardless of whether we're really in a new bull market, there's one costly mistake to avoid right now -- trying to time the market.
How long will this good news last?
Although many investors are hopeful that perhaps the worst of this stock market slump is behind us, others are still concerned about the long-awaited recession potentially around the corner.
Last month, researchers at Deutsche Bank said that they believe there's a "near 100%" chance that the U.S. will enter a recession in 2023. Treasury Secretary Janet Yellen, however, recently noted that while a recession isn't out of the question, the "odds of it, if anything, have gone down."
All of this conflicting information can be confusing for investors. If a recession occurs later this year and causes stock prices to fall again, it may seem like it's better to hold off on investing. But if the market continues to surge, now may be the best time to jump in and buy more.
Trying to time your investments, though, can be incredibly costly over time. While it can seem counterintuitive at times, it's often better to simply invest consistently, regardless of what the market is doing.
Why timing the market is so difficult
Timing the market involves buying at precisely the right moment to maximize your earnings. In theory, it sounds like a smart strategy. If you buy when prices are low then sell your investments when the market peaks, you could make a hefty profit.
In reality, though, because the market can be incredibly unpredictable, it's next to impossible to time the market effectively. Even the experts can't say where stock prices will be in the coming weeks or months. If you're making big financial decisions based on the market's short-term performance, it could be costly if prices don't go the way you'd hoped.
Over the long term, however, it's extremely likely the market will see positive total returns. Even if you buy now and then prices sink later this year, you should still see positive returns over several years.
For example, say you had invested in an S&P 500 index fund in January 2009. Almost immediately after, the market took a turn for the worse -- which may have made it seem like a terrible time to invest. However, within five years, you'd still have earned returns of more than 100%.
Trying to time the market and buy at the right moment is incredibly risky. But when you keep a long-term outlook and invest consistently, despite the short-term ups and downs, you're far more likely to see positive total returns.
The key to maximizing your earnings
The secret to surviving market volatility is to invest in the right places. If the stock market does dip later this year or we face a recession, not all stocks will be able to survive.
However, stocks from healthy companies have the best chance of rebounding. These companies are the ones with strong underlying business fundamentals, such as solid financials, a competent leadership team, and a competitive advantage.
While these stocks may still take a hit in the short term during periods of turbulence, they're far more likely to recover and go on to see long-term growth. The more of these stocks you have in your portfolio, the better off you'll be -- regardless of what the future holds for the market.
