Your Biggest Investing Mistake
Markets tend to go up over time.
But in down markets such as what we are seeing this year, investors are overcome by their loss aversion instincts, thinking that if they don't sell, they stand to lose more.
For the long-term investor, selling, or creating a permanent loss, due to temporary volatility, is the biggest mistake you can make.
The S&P 500 has average intra-year drops of 14%, yet annual stock market returns have been positive for 32 out of the past 42 years.
The average bull market lasts for 49 months, while the average bear market is 13 months long.
Periods when markets fell sharply – (2000-2002, 2007-2009 and early 2020) – felt, at the time, serious. But looking back they are rather small blips on long-term performance charts for many funds and stock markets.
During highly volatile markets, media is filled with negativity. Inflation, war, recession, war, unemployment. More war. During such times, investors like to overreact, assuming that things will never get better. They sell. This drives prices and valuations down and prospective long-term returns up.
More interestingly, if you look at the S&P 500 from Jan 1, 1990, through to December 2020, missing out on the best trading days can cost you. $1,000 invested in the index produced these returns:
- $20,451 if you were fully invested for the entire period.
- $18,329, if you missed the best single day over those 31 years, a gain of 11.6 percent on Oct. 13, 2008.
- $12,917, if you missed the best five days.
- $7,080, if you missed the best 15 days.
- $4,376, if you missed the best 25 days.
Because day-to-day returns are unpredictable, if you attempt to time the market, or think now is not a good time to invest, you are likely to miss some of the market’s biggest days. And the biggest days can occur at any time, even during long downward periods.
So based on numbers like these, it would makes sense to deploy money in the stock market as soon as you can (as long as you can handle further losses). Markets will likely continue to be volatile. But panic creates opportunity, and if you are a long-term investor, you want to be a buyer of opportunity.
It would make even more sense if you are already invested, to ride out the volatility and not hit the panic button too quickly. Again, long-term investors should be buyers of opportunity, not sellers.
If you are invested, or thinking of investing in stocks or funds, be prepared to own them for the long haul, for your best shot at building wealth is to stick to a carefully crafted plan and not deviate.