In the life of an investor, sometimes looking at portfolio values isn’t fun – when instead of a pleasing green next to your stocks’ daily movements, there’s a constant, unsightly red. We’ve been going through one of these stretches this year and you might feel distressed, which is an all-too-human reaction to seeing investment values drop.
Making matters worse, according to research on a phenomenon called loss aversion, you probably feel more pain from stock price losses than the enjoyment from a corresponding increase.
As a result, “Why didn’t I see this coming?” is a common lament during market downturns. You knew the good times couldn’t last and heard the talk about stock values dropping, but you kept investing instead of cashing out. The reality, though, is that people had been predicting an imminent demise in stocks for several years only to see prices continue to advance. Think about all the gains you would have missed out on by trying to get the timing just right.
Study after study show that timing the market is extremely difficult. In one such study from Putnam Investments earlier this year, if you had invested $10,000 in the S&P 500 on Dec. 31, 2006, and stayed fully invested over the next 15 years, you would have ended 2021 with $45,682. That’s a total annual return (stock price gains and dividends) of nearly 10.7%.
But if you had missed just the 10 best days of the market, your return would have been much lower: just over 5% for an ending value of $20,929. Missing the 20 best days? A paltry 1.59% annual return. And you would have actually lost money by missing the best 30 days.
Instead of marketing timing, the best strategy for many individual investors is to continue regular investing no matter what the market is doing. We can’t predict what the market will do, but we know that, historically, stocks have always recovered from bear markets to continue their progress upward. There are often large variations in returns from year to year, but the average annual return is about 10%, according to SoFi.com.
With this history in mind, investing regularly, also known as dollar-cost averaging, is a way to participate in long-term market increases while avoiding the futility of trying to guess the market’s direction. When stock prices are dropping, each regular investment buys more shares. When prices are increasing, you’ll enjoy the returns from the shares you bought when the market was down.
There are no guarantees any strategy will work, but dollar-cost averaging is a sound, time-tested approach that keeps you marching steadily toward your investment goals while minimizing the pain you’d feel by timing the market incorrectly.
In a volatile market, such as the one we’ve had this year, you might be tempted to wait for the best time to invest. But you also might pay a high price for waiting by missing the market’s best days. When it comes to investing, don’t let perfect be the enemy of good.
Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or firstname.lastname@example.org. Read more of his insights at heraldtribune.com/business. Securities offered through Avantax Investment ServicesSM, member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way, Suite 119, Lakewood Ranch, FL 34202.