Buy low, sell high. That's the idea when it comes to successfully investing in the stock market. Sounds easy, except it's not. For one thing, you don't know where, or when, the bottom is, and neither does anybody else.
Timing the market can be akin to predicting the future. Recommendations from those who say with certainty they can do just that -- and will sell you their secret -- should be treated with skepticism. Sure, trends can be obvious and influence choices. The broad market effect when long-predicted rising interest rates finally happened is a great example.
Indeed, an endless array of factors affect the stock market and individual companies. They include macro factors like the economy and global events, and micro factors like product successes and failures at individual companies, their earnings reports, the guidance they issue, and Wall Street analysts' own forecasts and expectations.
Image source: Getty Images.
The list goes on, but the point remains the same: You can't predict when the bottom will happen. In fact, waiting for that bottom can prove costly. But you can be assured the stock market has a long history of rewarding those who buy shares of proven companies or indexes and simply hang on.
The best days are easy to miss
History shows that if you jumped in and out of the market at the wrong times and missed its best 10 days over the past 30 years, your total returns would be cut by 50%. Make that more than 80% if you missed the best 30 days over that same 30 years.
You also have to time it more than once. Prices change rapidly, and market volatility means identifying the bottom will require hitting a fleeting target.
Time in the market, not timing the market
There's an adage that it's time in the market, not timing the market, that wins the day -- especially when that "day" is actually years of investing in solid companies, funds, and market indexes.
Data by YCharts.
The chart above shows how much a $1,000 investment in three large exchange-traded funds that track major indexes has grown in the past decade. That's a pretty impressive performance for a passive investment. Many stocks have done much better -- and many more much worse. Index funds like these mean you don't even have to choose.
Patience builds the bottom line
But if you do, don't plan to exactly hit the perfect time to buy (or sell). You still have to do your research on each company, but the bottom line is that you can't count on buying at the bottom. Instead, focus on long-term investing in a diversified portfolio that eschews the near horizon and instead fits your investment goals and accompanying risk tolerance over time.
That approach will not only save you stress but make you money.
