Don’t time the market, get all emotional, and miss opportunities for long-term gain.
Last year at this time, the bear was biting and the market was bleeding cash. The S&P 500, for example, just wrapped up its worst first half of a year in the past 50 years and would swoon even more come October.
Now, inflation is cooling, interest rates may have peaked, employment is staying strong, and recession fears may be easing. That improved market perception has resulted in a dramatic rally, as shown here by the performance of the S&P 500 and NASDAQ Composite indexes.
^SPX DATA BY YCHARTS
So, have we gone from a bear market to a bull market? Does this mean it’s safe to jump back into stocks with both feet? Or did the pummeling you took last year make you want to stay on the sidelines this time?
If you take the latter path, that timidity could cause you to miss out on gains if a sustained rally does materialize. And, as history shows, they often do.
Mistake 1: Market timing
Timing the market is hard, really hard — some might say impossible. That’s probably especially true for people who aren’t full-time stock market professionals. Truth be told, you’re as likely to sell right before a rally as you are to buy right before a market collapse. The biggest gains very often occur very quickly — often in a single day or week or two — and the same goes for the losses. By the time you realize that, it can be too late.
Mistake 2: Investing with your emotions
It’s easy to get caught up in market frenzies. That human tendency is what causes a lot of market volatility in the first place. But don’t let the heat of the moment drive snap decisions. Instead, keep calm and carry on with a long-term strategy and resist the urge to make impulsive changes based on short-term market fluctuations.
Mistake 3: Failure to diversify
Emotional investing can help lead to putting all your eggs in one basket. Bad idea. Good idea? Protect your investments and optimize your returns by spreading your investments across different asset classes, sectors, and geographic regions. Smart asset allocation minimizes risk and can even help you cool your jets as you see the different parts of the whole picture move in different ways.
Tune out the noise: Invest for the long term
Investing is a journey and an end game. Here’s a look at the past 30 years — representing the most active wealth-accumulating span for many working and investing folks — for those same two benchmarks referenced above, this time expressed in terms of what they did for a $10,000 investment.
^SPX DATA BY YCHARTS
Past performance never guarantees future results, but staying the course with sound investments in a balanced portfolio and adding money to it regularly is a long-proven way to build wealth and financial security.
Tune out the noise, including inside your head, and focus on your long-term goals. That will help you capture the gains of an emerging bull while avoiding the mistake of letting fear hold you back.
