Trying to time the market has long proven a fool’s errand.
Consider if you missed just 10 of the best days in the past 20 years.
This would have cut your annualized returns by 40%.
A bear market may not be the first thing on your mind, considering that the stock market has had fantastic gains over the past five years, with the S&P 500 (SNPINDEX: ^GSPC) up 78%, the Dow Jones Industrial Average (DJINDICES: ^DJI) up 53%, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) gaining 84%.
Still, bull markets are, unsurprisingly, followed by bear markets, and rising inflation and geopolitical instability are worrying some investors.
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It’s easy to assume that when a bear market shows up, you should pull your money out of the market. But history shows that’s a huge mistake. Here’s why you should continue investing, even when the market enters a downturn.
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The main problem with timing your entry and exit from the market is that almost no one gets it right. Most investors are either too soon or too late in calling the top of the stock market and just as bad at calling the bottom.
A good example of this is the dot-com bubble and burst. Bear markets last an average of 15 months, but not always. The dot-com bear market lasted 31 months. That’s twice as long as usual, and getting the timing right for when the bear market was over was nearly impossible.
Or, take the current AI stock boom as another example. Some people think we’re nearing the top right now, while others believe this is still the early innings of AI-fueled stock market returns.
If you get out of the market now, you could potentially lose out on several years’ worth of market gains.
Even if you’re confident in market timing skills, history says that keeping your money in the market gives you a far better chance of maximizing your returns.
Research from J.P. Morgan shows that over the past two decades, the seven best days in the market came within two weeks of the 10 worst days. This means that if you exit your stock positions because the market is in a drought, you’re almost certain to miss out on those best days.
And it could really cost you. History shows that missing out on the S&P 500’s 10 best days over the past 20 years resulted in annualized returns being cut by nearly 40%, compared to staying fully invested.
Given the historical data, staying in the stock market and continuing to invest is the best strategy for maximizing your returns. Owning an S&P 500 index fund, like the Vanguard S&P 500 ETF (NYSEMKT: VOO) is a great way to do this, as it spreads your money across the top companies in the U.S., across all sectors of the economy.
Since 1957, the S&P 500 has had an annual historic return of 10%. You certainly won’t earn that during bear markets, but during bull markets, you could potentially earn much more. It should be no surprise, then, that legendary investor Warren Buffett recommends an S&P 500 index fund for most investors. Vanguard ETFs are a great option, Buffett has said.
The point here is that you have to take the market’s bad with the good to earn consistent returns. That means buying stocks for the long term and holding them through difficult times.
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Chris Neiger has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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