The market has been volatile lately, and these movements could result in losses.
After entering a bull market over the past year; S&P500 (^GSPC 1.26%) I’ve been stumbling over the past few weeks. The index is currently down about 4% from its peak in late March, and some investors are starting to feel pessimistic about the future.
Exactly where the market is heading is unclear, and even experts can’t say for sure whether this slump will continue or whether stocks will recover soon. But whatever happens, there are two moves you should avoid for now.
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1. Withdraw funds from the market
If you’re worried that stock prices will fall further, you may want to take your money out of the market while prices are still relatively high. However, this strategy can do more harm than good.
Again, it is uncertain what will happen to the market in the short term. Stock prices may continue to fall, but the market may soar tomorrow. Guessing the direction of a stock price and being wrong can be costly.
For example, let’s say you decide to pull your money out of the market right now. If the stock price skyrockets, you’ll miss out on potential profits. If you then decide to reinvest later, you will buy the same shares you sold, this time at a higher price.
2. Wait for the right moment to invest
When markets are volatile, many investors want to wait for the best time to buy. However, the market is unpredictable in the short term, so there is no perfect moment to invest. And the longer you wait, the more time you lose until your money grows.
Time is your most valuable asset when building wealth in the stock market. You can often make more money by buying at a “bad” moment than if you wait and invest when the market seems safer.
For example, let’s say you invested in an S&P 500 index fund in January 2009. The market had one more big drop before bottoming out during the Great Recession, and it may have seemed like the worst time to invest at the time. Still, the total return over the next five years will be about 105%, more than doubling his funds.
^SPX data by YCharts
Now let’s say you decide to wait just one year and invest in January 2010. At that point, the S&P 500 was well into a bull market, and you might have thought it was a safe time to invest. However, by 2014, the return was only about 66%.
^SPX data by YCharts
time of the market is much more important than that timing market. Even if stock prices decline in the coming weeks or months, you can still make more money by investing your money over time than if you invest at the “best” moment.
One smart investment move to make now
It may seem counterintuitive, but one of the best things you can do right now is to ignore short-term market fluctuations. Investing when markets are volatile can be nerve-wracking, but ignoring the day-to-day movements can often make it easier to keep a clear head.
The long-term performance of the market is far more important than the short-term ups and downs, and historically, markets have a perfect track record of recovering from downturns. If you just hold your investments and stay in the market for as long as possible, you are much more likely to see positive returns over time.
However, it’s equally important to make sure you’re investing in blue-chip stocks in companies with solid underlying business fundamentals. Strong stocks are much more likely to recover from periods of volatility and achieve long-term growth, and the more of these stocks you have in your portfolio, the more secure your money will be.
The recent decline in the stock market is nerve-wracking. You’re not alone in being upset by this fluctuation. But by leaving your money in the market, investing consistently in blue-chip stocks, and maintaining a long-term outlook, you can maximize long-term returns while minimizing risk.
