The one thing that's fully predictable about the stock market is volatility. With this volatility comes the habit of looking back and thinking about how much money you could've made (or saved) had you made certain investment moves before a particular rally or down period.
The S&P 500 -- which is often used to gauge the overall health of the stock market -- has seen more than enough volatility in the past few years to leave many investors wondering what could've been. This year hasn't been any different: After climbing 20% through July, the index is down over 9% since then.
If recent swings are causing you to question whether now's the right time to invest, there's one chart that can answer your question.
The goal isn't to time the market
One of my favorite investing quotes is: "Time in the market beats timing the market." It sounds simple, but it's powerful when you realize just how true it is.
To get some perspective, let's imagine someone invested $10,000 in the S&P 500 on Dec. 31, 2007, and left it there until Dec. 31, 2022. Here's how the value of that investment would look based on how many of the S&P 500's best days (defined by single-day price movements) were missed.
| Number of Best Days Missed | Value of $10,000 Investment | Annualized Total Return |
|---|---|---|
| 40 | $4,401 | (5.3%) |
| 30 | $6,399 | (2.9%) |
| 20 | $9,748 | (0.2%) |
| 10 | $16,246 | 3.3% |
| 0 | $35,461 | 8.8% |
Data source: Putnam Investments.
Even missing just 20 of the S&P 500's best days -- out of 3,780 total trading days -- resulted in losses over that 15-year period.
In the interest of fairness, an argument could be made about the differences in value by missing some of the S&P 500's worst days, but that goes back to the difficulty of timing the market. You may be right a few times, but timing the market correctly and consistently over the long term is all but impossible.
The focus should be on consistency
Investing consistently is much easier when stock prices are rising versus falling. If you can easily imagine the money you invest today will be worth more in the near term, of course you'd want to invest it as soon as possible. Unfortunately, the stock market is far from predictable over a short time horizon, and that's what makes attempting to time it a fool's game.
One strategy to avoid the temptation is dollar-cost averaging. When you dollar-cost average, you put yourself on a set investing schedule and commit to sticking to it, regardless of how the market is moving at the time.
For example, if you commit to investing $500 monthly into the S&P 500, you could decide to invest $250 every other Friday or $125 every Monday. The frequency of your investments doesn't matter as much as making sure it's a schedule you can stick to.
You'll inevitably invest when stocks are overvalued and undervalued, but the most important part is remaining consistent and spending as much time in the market as possible versus waiting for the "ideal" moment. As the above chart shows, missing just a few key days can be very costly.
