The last year and a half has been promising for the stock market, with the S&P 500 (^GSPC 0.97%) surging by close to 40% from its lowest point in October 2022. But the index has fallen by more than 5% over just the last three weeks, which has many investors feeling nervous about the future.
Investing can be daunting even when stock prices are soaring, but periods of volatility can be difficult for even the most seasoned investors to stomach. However, your strategy when the market is shaky can make or break your earnings potential.
While there's no single correct approach to investing, there's one move that could potentially cost you over time: waiting for the best moment to buy.
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The risks of trying to time the market
It can be tempting to wait for the best possible moment to invest, especially when the market is volatile. After all, hindsight is 20/20, and it's easy to look back on how much you could have earned had you simply invested when prices were at their lowest and then sold when the market peaked.
But the market is incredibly unpredictable in the short term, and nobody knows how long this sell-off might last. Maybe stock prices will surge tomorrow, or this slump might continue for weeks. Buying at the "perfect" time, then, often involves more luck than skill -- and if you guess wrong, it could be costly.
For example, maybe you're predicting that stock prices will continue falling, so you sell your investments right now. But if the market quickly rebounds, you'll have missed out on those earnings. Then, if you decide to reinvest later, you'll end up paying higher prices for the exact stocks you just sold.
Similarly, say you're holding your investments but choosing not to buy until the market stabilizes. If prices continue to fall, you'll miss out on the chance to load up on quality stocks at a discount. But if prices increase, you could have seen higher earnings had you invested more now.
Time in the market is more important than timing the market
When it comes to maximizing your long-term earnings, time is your most valuable resource. Even if you invest at a "bad" moment, you can still earn more over the long haul than if you were to wait for a "safer" time to buy.
For instance, say you invested in an S&P 500 index fund in January 2020. At the time, the market had been thriving, with the S&P 500 soaring by nearly 190% over the past 10 years. However, it was also just a couple of months away from the COVID-19 crash in March 2020 and the subsequent slump throughout 2022.
While it may have seemed like an awful time to invest back then, you'd still have earned total returns of close to 54% by today -- despite all the volatility the market has faced over the past four years.
On the other hand, say you had waited until June 2021 to invest. At that point, the market had been surging for over a year and still had several more months of growth ahead. However, you'd only have earned total returns of around 18% by today.
Waiting for a "safer" moment to invest often means missing out on valuable time to let your money grow. While it can sound counterintuitive, it's generally better to invest consistently no matter what the market is doing, rather than waiting until the perfect moment to buy.
The keys to surviving market volatility
Regardless of what the future has in store for the market, keeping a long-term outlook and investing in the right places can help protect your money.
The market will always be volatile to a degree in the short term, but over decades, it's consistently seen positive total returns. By riding out the storms and staying invested for the long haul, you're far more likely to see long-term growth.
Also, investing in strong stocks from healthy companies will give your portfolio a much better chance of recovering from downturns. The strongest stocks are from businesses with solid underlying fundamentals, as they're the most likely to survive market slumps and grow over time. The more of these stocks you own, the less you'll need to worry about short-term volatility.
The recent stock market sell-off may be concerning to investors, but the right strategy can better protect your savings. By investing consistently in strong stocks and keeping a long-term outlook, it will be much easier to maximize your earnings over time.
