After 2022 gave the stock market one of its worst years ever, with a 19% drop in the S&P 500, 2023 has the investment community in a far better mood. The S&P 500 was up 16% through the first six months of the year, and it's now up 21% from the 52-week low it touched in October.
You might be wondering if a new bull market is coming that will propel stock prices even higher. If one is in the offing, or already underway, it might be a smart idea to put more of your capital to work to take advantage.
But I believe this is the wrong question to think about. A better question to ask is, "Are my personal finances set up so that I can be an investor for many decades to come?"
Here's why this is what investors should be focusing on.
Image source: Getty Images.
Focus on what you can control
Whether a new bull market is on the horizon or not doesn't really matter if you are regularly contributing more money to your portfolio -- whether you do it weekly, biweekly, monthly, or quarterly. This strategy, known as dollar-cost averaging, ensures investors will be buying new shares at multiple entry prices. And it spares you the need to even think about what the market will do in the next three, six, or 12 months.
Historically, the S&P 500 rises at an average annual clip of 10%. Of course, some great years and some terrible years go into that average, but the long-term trend is hard to deny. And this is why it's best to just focus your attention on achieving your own financial goals, whatever they may be.
However, to make sure that you can be a consistent buyer of stocks, you have to take care of your personal finances, which means paying off high-interest debt and building up an adequate emergency savings fund. Besides being on solid financial footing, when the market drops like it did in 2022, you won't be forced to deviate from your investing plan.
Charlie Munger, Warren Buffett's right-hand man and longtime business partner, said: "The first rule of compounding: Never interrupt it unnecessarily." Staying in the market and taking advantage of its long-term wealth-building power is something that is largely under each investor's control.
Good luck timing the market
It's certainly tempting to try and figure out when a falling market is going to bottom out. That's because if you can spot the bottom of a cyclical downturn, that would be a great moment to aggressively put money to work in the stock market that you might have sitting on the sidelines.
Moreover, correctly predicting when the market is about to hit a new peak could be advantageous. A foresightful investor could sell their holdings, capturing profits, and then just wait until the market hits another low point before becoming a buyer again.
This all sounds pretty simple, right? But it's not.
While timing the market accurately might have huge financial rewards, trying to do it is really a complete waste of time. Studies show that investors who buy and sell in an effort to avoid the market's worst days while also benefiting from the best days wind up doing serious damage to their overall returns.
Data from Bank of America prove this. If an investor was smart and lucky enough to avoid the 10 worst trading days of the past decade, their returns would've certainly gotten a boost. But the worst days are usually followed closely by some of the best days. So it's incredibly unlikely that you'd be able to hop in and out at the right times. Attempting to get the timing right only creates tons of room to make costly errors.
You're much better off being fully invested, buying new shares regularly, and understanding that the market's volatility is just a part of the game. Handling the ups and downs without panicking is the key to long-term wealth creation.
