Time in the market matters much more than timing the market.
Investing successfully is a difficult endeavor. Not only do you need to find the right companies to buy, but you must also deal with your own emotions. And these days, in a world dominated by a constant firehose of information, this can be a difficult task.
In that same vein, if you’re someone who constantly worries that you missed the market bottom, I’m here to tell you that it really isn’t that big of a deal in the grand scheme of things. Your financial goals are still attainable even without correctly timing the market. Here’s why.
Investing is all about keeping the right mindset
The S&P 500 ended up dropping 19% in 2022. But looking back, it appears to have bottomed out on Oct. 12 at the 3,577 level, as the index is now up about 14% since then, as of this writing. You can see similar price action with a large-cap retailer like Home Depot, whose shares are up 18% since Sept. 26. Investors who were lucky enough to time that low point are sitting on some nice paper gains right now.
There’s a certain allure to timing the market correctly. Not only does it prove your analysis is correct and support the notion you might be smarter than the rest of the market, it maximizes your potential financial gains. And this is really important, especially with your hard-earned savings.
Once asset prices start to rise in short order, FOMO (fear of missing out) also begins setting in among investors. While there isn’t a clear metric to follow that tracks this kind of sentiment, there are other clues. For example, investors could be seeing FOMO setting in among the most speculative of assets, including growth tech stocks.
Peloton Interactive is up 86% so far this year, yet the business is still struggling with falling revenue and sizable net losses. Additionally, cryptocurrencies are seeing their prices soar. Solana, known for its fast transaction processing times, is up a whopping 112% year to date.
When markets are volatile and the economic picture is uncertain, it’s that much more difficult to correctly spot a bottom. Therefore, there’s a high probability that after you buy stocks, they will lose value in the near term. This is totally normal, and in fact, it should be expected, because it is almost impossible to consistently time the market. Investors are better off mentally preparing themselves for losses when they buy stocks.
With that in mind, it’s of the utmost importance to maintain the right perspective and temperament when it comes to investing. This means understanding the companies you own and why you own them, as well as keeping a long-term mindset. Whatever happens with the stock market in the near term is hardly of any significance when you zoom out.
In my own portfolio, I own shares of fintech and payments leader Block. Shares ended 2022 down 61% on the year, but they’re up 19% so far in 2023 (and were up as much as 40% earlier this month). While this is an encouraging development for me to see as a shareholder, I’m more focused on the underlying business, which continues to post strong growth. Given enough time, what really matters to the stock price will be how revenue and profit trends move, not timing the bottom.
If the companies you have in your portfolio are performing well at a fundamental level, especially as many businesses struggle with the challenging environment today, then that’s clearly a good sign. And it’ll help keep your emotions in check no matter what happens to stock prices in the short term. Moreover, staying optimistic and adding savings regularly to your portfolio is a recipe for satisfying returns. This will ensure that you maintain the right mindset regardless of what is happening around you.
