You’ve heard the saying that timing is everything? While that may hold true for matters of the heart, it’s actually terrible advice to follow when it comes to investing.
It’s easy to understand why people can be seduced into trying to enter and exit the market between the dips, especially during periods of high volatility. Of course it would be wonderful to buy low and sell high. However, your timing would have to be nearly perfect in order to maximize gains from this strategy.
Let’s consider a hypothetical $10,000 investment made in an S&P 500 index fund beginning Jan. 2, 1998, and exiting the market on Dec. 31, 2017. If you left your funds fully invested during that entire period of time, your value would be $39,925 by the end of 2017. However if you only missed the top 10 days of returns, your market value would be reduced by almost 50% to just $20,038. Half your value in just 10 trading days — in this case bad timing could cost you a lot.
How can this possibly be the case? It’s because when markets rebound after major losses or corrections, they can do so very, very quickly. And that’s why sitting out just a few days can have such a disastrous impact.
If it’s pretty much impossible to “time the market,” then how can you try to protect yourself while staying in a position to realize the gains you need to reach your retirement and other financial goals? Staying fully invested in up and down markets is the only way to guarantee not missing the dramatic upside potential when markets rebound — the rebounds that we’ve seen can account for such a large portion of overall growth over time.
Another time-tested strategy is dollar-cost averaging. Dollar-cost averaging is when you purchase a fixed amount of an investment at regular intervals. This allows you to buy fewer shares when prices are lower and more shares when prices are higher. When you make regular, fixed contributions to your 401(k) with every paycheck, you are, in fact, practicing dollar-cost averaging — just one of the reasons participating in a 401(k) is such a smart idea, alongside the tax benefits and potentially receiving a company match.
Finally, having a sound and diversified asset allocation can help provide stability. By spreading out your total investment across different asset classes that respond differently to market conditions, you can take advantage of large gains in specific sectors while still minimizing risk when certain segments of the market underperform.
Familiarizing yourself with historical trends and market performance over time can also help give you more confidence to ride out the occasional and sometimes dramatic ups and downs that have always been present in the market and likely always will be. But what’s most important is not letting fear of an occasional downturn keep you on the sidelines for the (sometimes very few) trading days that can make such a difference toward reaching your financial goals. When it comes to investing, in turns out that tenacity is much more important than timing.
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