After entering a bull market last year, the S&P 500 (SNPINDEX: ^GSPC) has stumbled in the last few weeks. The index is currently around 4% below its peak in late March, and some investors are becoming pessimistic about the future.
It’s unclear exactly where the market is headed, so even experts can’t say with certainty whether this downturn will continue or whether stock prices could soon recover. Whatever happens, there are two steps to avoid right now.
1. Pull your money out of the market
If you’re concerned that stock prices will fall even further, it may be tempting to withdraw your money from 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 near future. While stock prices could continue to fall, the market could also rise tomorrow. If you guess where stocks are going and your guess is wrong, it can be costly.
Suppose you decide to withdraw your money from the market immediately. If stock prices rise, you’ve missed out on potential profits. If you decide to reinvest later, you’ll end up buying the same stocks you just sold – this time at higher prices.
2. Wait for the perfect time to invest
When the market is volatile, many investors want to wait for the best time to buy. However, because the market is unpredictable in the short term, there will never be a perfect time to invest. And the longer you wait, the more time you lose for your money to grow.
Time is your most valuable asset when building wealth in the stock market. Oftentimes, buying at a “bad” time can still help you earn more than if you had waited and invested while the market seemed safer.
For example, let’s say you invested in an S&P 500 index fund in January 2009. The market experienced another sharp decline before bottoming out in the middle of the Great Recession, and at the time that may have seemed like a terrible time to invest. Still, over the next five years, you would have achieved a total return of around 105% – more than doubling your money.
Now let’s say you decided to wait just a year and invested in January 2010. The S&P 500 was already in a bull market at the time, and it may have seemed like a safer time to invest. However, by 2014 you would have only generated a return of around 66%.
time in The market is far more important than timed coordination the market. Even if stock prices fall in the coming weeks or months, giving your money as much time as possible can help you earn more than investing at the “best” time.
A smart investment move you should make now
While it may seem counterintuitive, the best thing you can do right now is to ignore the short-term fluctuations of the market. It can be nerve-wracking to invest when the market is unstable, and ignoring the daily movements can often make it easier to keep a clearer head.
The market’s long-term performance is far more important than its short-term ups and downs, and historically it has an impeccable track record of recovering from downturns. If you keep your investments simple and stay in the market for as long as possible, you are far more likely to see positive returns over time.
However, it is equally important to ensure that you invest in quality stocks from companies that have solid business fundamentals. Strong stocks are much more likely to recover from periods of volatility and experience long-term growth. The more of these stocks you have in your portfolio, the safer your money will be.
The recent stock market selloff is nerve-wracking. So if you’re feeling shaken by this volatility, you’re not alone. But by keeping your money in the market, consistently investing in quality stocks, and maintaining a long-term perspective, you can maximize your long-term returns while minimizing risk.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
S&P 500 Sell-Off: 2 of the Worst Investing Moves You Could Now was originally published by The Motley Fool