If you look at the recent high levels of the stock market you will be forgiven and we thought that the gains we saw in 2020 are not sustainable. In fact, amid rising unemployment, continued economic intervention by the Federal Reserve, and a staggering death from a life-changing virus, the stock market seems to be torn apart by reality.
These factors may be alone enough to sell experienced investors out of their winning positions, putting money in large bags marked with dollar signs and waiting for inevitable improvement. Despite very rational inclinations, do not try time to sell the market now and buy later; Instead, take both of your hands and sit firmly on them.
Market timing is a losing battle
The market will collapse again. This cannot happen today; It may not even be for years, but it will happen. On average, in the last 70 years, the stock market has declined by at least 10% once every 23 months. These market reforms sometimes cause intestinal malfunction, but they are unavoidable. However, the higher your time horizon for buying and holding great companies, the more likely you are to see growth. This is because, despite often being factual in reforms, the S&P 500 (generally the accepted representative of the US stock market) has given an average return of about 10% per year compared to the previous century.
That’s why trying to give time to the stock market is not in your favor – after you sell, the market keeps going up. Successful times are made harder when you consider that large stock market reforms such as the Great Recession only appear as blips on the stock chart. These blips appear to be unsymmetrical rather than having an exponential curve from upper left to right over the long run. While these improvements may actually be inconsistent for an investor buying and holding over extended periods of time, the improvements are not felt at all at the time.
For example, let’s look at market reforms in mid-March. First, investors would have seen a five percent drop in the stock market and rush to buy companies on sale. While this may have served you well as the S&P 500 is now around record height, you miss the rest by 30%. Likewise, once market prices dropped in March, many investors sat waiting for a better deal. Investors who waited too long missed some or all of the rally they had seen in the last few months.
If this sounds particularly relevant, as the market’s 4.3% drop in two days has left investors if it is the next major correction. Instead of making it difficult to invest on our own, let’s look at an alternative strategy that dispels the presumption of trying to time the market.
Enter dollar-cost averaging
A popular strategy is dollar-cost averaging, rather than trying to invest in companies you love based on short-term market fluctuations. Despite the mathematically sounding name, the dollar-cost average is pretty straightforward: Instead of buying your entire position in one company at a time, you invest at regular intervals (such as once a paycheck, monthly or quarterly).
Instead of investing based on emotion, intuition, or pure luck, someone who invests on a dollar-cost average pre-planned time. This can be particularly helpful in times like these, with periods of widespread market fluctuations. If you had a dollar-cost average of your investment outlook in March, you would not have invested at all, but you would have invested during the entire correction. Even if you had tracked the S&P 500 at the worst time to buy in March when you bought an index (before the market dropped), you would still be sitting at over 13% return! The average cost of the dollar can allow investors to sleep at night without the day-to-day fluctuations of the market.
Just don’t sell
If the dollar-cost average in the market is not for you, at the very least, do not sell. Make sure that you are not investing any money in the next three to five years, you should be prepared to invest in both good and bad times. Semi-continuous drops in the market create great buying opportunities; However, they are just that – an opportunity to buy companies you love. If you are confident that the stock market is about to crash, a winning move could be to continue building your portfolio through dollar-cost extraction. whereas Creation of cash position. That way, you are not missing out on keeping companies that you believe if the market has not improved. And if Does, Be prepared to deploy that capital and buy great companies on sale.