After a volatile post-election market, the S&P 500 (^GSPC -0.40%) now sits about 4% below its all-time high, but the Nasdaq-100 is down by roughly 11%. Anybody waiting to buy the dip certainly has an opportunity right now. But whether they take it is something else altogether.
Down markets tend to bring out some of the worst behaviors for investors. Instead of looking at scenarios like right now as chances to buy stocks on sale, they tend to view them as risky situations where stocks could fall further. Some people get so consumed with trying to find the bottom that they end up missing out on the opportunity altogether.
Investing is one of the few things where doing less is often rewarded more. But people tend to wonder about whether stocks are too expensive, or stocks could drop more, or some economic disaster is imminent. This kind of analysis paralysis can actually damage returns because they wait for something to happen that never comes.
The best path is usually just to keep doing what you’re already doing.
Image source: Getty Images.
The reward for perfect timing is smaller than you think
Charles Schwab (SCHW +1.73%) published a popular study last year looking at different hypothetical investors who invested their money in different ways. Each invested $2,000 annually over the course of 20 years:
- “Peter Perfect” invested his money at the lowest point every year.
- “Ashley Action” invested her money on the first trading day of the year.
- “Matthew Monthly” invested his money in 12 equal portions at the beginning of each month.
- “Rosie Rotten” invested her money at the highest point every year.
- “Larry Linger” left his money in cash and never invested in stocks at all.
The results were surprisingly close given the different approaches. Peter, not surprisingly, did best with an ending balance of $186,077. But Ashley and Matthew weren’t that far behind with $170,555 and $166,591, respectively. Even $151,343 accumulated by Rosie was a substantial gain on her investment. Larry, with all of his money in cash, finished with just $47,357 and proved a very important point.
The biggest factor for building long-term wealth is simply being invested in stocks. The gap between being a flawless market timer and just investing on a regular set schedule is pretty modest. Being right pays off little, but being wrong costs a lot.
Today’s Change
(-0.40%) -30.73
Index Level
7,561.67
Key Data Points
Day’s Range
7,499.40 – 7,621.78
52wk Range
6,316.91 – 7,844.52
Market corrections are regular but uncommon
There are a few things that you need to accept when investing in stocks.
First, volatility is an everyday occurrence. Stocks go up and down all the time. Second, a 10% correction has happened 56 times since 1928, or once in just under every two years. A 20% bear market has occurred 22 times, or once every four years. Third, stocks trade less than 10% from their highs much more often than not.
In other words, if you’re waiting for a double-digit pullback in the S&P 500 before you invest, you might be waiting a while. During that time, there’s a good chance you might be missing out on a sizable gain. Plus, even when that correction arrives, are you going to be able to hit the buy button when a lot of other people are probably running for the exits?
It’s better to just put your investments on autopilot and remove the waiting and guessing altogether. As we see in the Schwab study, market timing tends to do more harm than good. And even if you get it right, the added benefit probably isn’t going to be that significant. It’s better to just schedule regular investments and ignore short-term conditions altogether.
A simple plan works best
In general, investing now and ignoring whether or not you’re buying at the “right” time will probably yield the best results. Here’s a good plan to think about:
- Make your investments automatic, such as monthly into a brokerage account or every paycheck into a 401(k).
- Avoid the temptation to sell when markets turn volatile in the short term. Focus on long-term goals instead.
- Remember that dollar-cost averaging can lower your overall cost basis and improve your returns over time.
Market pullbacks can be uncomfortable. But how you react to them will determine your long-term success.
Where to invest $1,000 right now
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