Why You Shouldn’t Worry About Investing at the Top

August 03, 2017

Have you been seeing a lot of news articles lately about how the US stock market is overpriced and due for a decline soon? Of course, correctly timing the market is notoriously difficult. Not only do you have to know when to get out, you also need to know when to get back in. But what if the prognosticators are right and you’re unlucky enough to invest at the very peak of the market?

Getting it totally wrong

This article looked at what would have happened if a hypothetical investor had invested at all the wrong times over the last few decades: 1973 before a 48% decline in the S&P 500, September of 1987 just before a 34% crash, and then right before the 2000 and 2007 bubbles burst. Sounds pretty dismal, huh? It turns out that our spectacularly awful investor still would have earned a 9% average annualized return! That’s because they never sold and held the stocks until the eventual recoveries. So what can we learn from this?

You’re in it for the long haul

First, only invest if you can keep the money invested for the long run, ideally at least 5 years. Otherwise, you risk needing the money when your investments are down in value and you’re forced to sell at a loss. Any money you need in the next few years should stay someplace safe like a savings account instead.

Don’t put all your eggs in one basket

Second, be diversified. These results were based on investing in the stock market as a whole. An individual stock can go all the way to zero and never recover. It would take essentially the end of the world for that to happen to the entire stock market. In that case, your investments will be the least of your worries.

Ride out the storms

Finally, don’t sell during downturns. Stock market declines are inevitable and generally happen every few years. The key is to not let them affect your long term investment plan. Try to ignore them or even better, consider re-balancing your portfolio to make the declines actually work in your favor.

Take the plunge

This is another reason why I love investing. You can have the worst luck in the world and still come out doing pretty well. The key is to have patience. As they say, it’s time in the market, not timing the market that matters. So if you’re waiting for a market dip to get in, you could be wasting your time. Just do it!

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