When the market has a rough day, panic-selling your investments may be a natural impulse—but it’s an illogical one. The gist, if you forgot: Investing is about reaching long-term financial goals, and that requires staying calm in all sorts of market conditions. Plus, the U.S. stock market has rebounded from every significant downturn in history and continued growing over time.
Perhaps the more logical-sounding impulse might be the reverse: to avoid investing when the market is going up. But that’s not a good idea either.
Well, back up. At the core of questions like “should I invest when the market is down?” and “should I invest when the market is up?” is really: Can I time the market? So let’s focus there instead. That answer is: highly unlikely. Even professional traders don’t do it successfully most of the time.
By keeping your money out of the market—because prices are up or down—you risk of missing out on future gains.
There are many over history, but here’s a recent one. Stocks were on a tear for the first half of 2016. The S&P 500 (an index that tracks 500 U.S. company stocks) opened the year around 2,000 and was almost 2,200 in August. That’s a nearly 10-percent gain in just seven months.
But let’s say that with a volatile presidential election looming, you sold your investments and walked away with those nice short-term gains. Stocks did drift lower in the fall, dipping below 2,100—before notching basically straight-line wins for the next two years and reaching nearly 2,900 in September 2018. Selling in summer 2016 would’ve meant missing out on 35 percent gains.
Forget that “buy low, sell high” aphorism, and replace it in your mind with this one: It’s about time in the market, not timing the market. That’s why investing for the long term has historically been a winning strategy.
An easy way to stay on track no matter what the market’s doing: Practice dollar-cost averaging. That’s when you regularly invest a set amount of money over a long period of time—allowing you to buy more shares when stock prices are low and less when they’re high.