INDONESIAKININEWS.COM - While the market outlook is grim, history shows timing the market isn't usually successful. September was an ugl...
September was an ugly month for the stock market. The Dow Jones Industrial Average fell nearly 8% in the month and dropped below 30,000 points for the first time since December 2020. This level officially plunged the Dow into bear market territory (down 20% from its all-time high), joining the S&P 500 and Nasdaq Composite.
Clearly, this is an uncertain time in the stock market, and many may be scared about their investments. These feelings are natural, as watching your brokerage account lose value creates an emotional response. As a result, many investors may think it's time to sell to wait out this market.
While selling might seem logical, it's not a smart move. Here's why.
Market timing is a losing strategy
Although the old adage of the stock market is to buy low and sell high, this is easier said than done. The better thought process is: Time in the market is better than timing the market. The reason? Missing out on the stock market's best months can kill your returns.
When you sell entirely out of the market, you must get back in at some point. If you do this perfectly, it's theoretically possible to make greater returns, but not as big a margin as you might expect. For example, a Charles Schwab study looked at several hypothetical situations, including one comparing two theoretical investors, one who bought $2,000 worth of stocks at the lowest point of each year from 2001 to 2020 and one who invested on the first trading day of the year. Ultimately, the person who timed the market perfectly made $151,391 versus the immediate investor's $135,471.
Keep in mind, that's with perfect timing. There are about 250 trading days a year, so you'd have to nail a 1-in-250 chance 20 times to have achieved this. That's a pretty impressive feat. Plus, it's only about $16,000 more for a lot more effort.
What happens if you sell but miss some of the best months of the year? Merrill (formerly known as Merrill Lynch) found that if you invested $1,000 in 2001 but missed the top 10 performing months through 2020, your investment would be worth $1,699. If you left it alone, it would be worth $4,222.
What do many of these months have in common? They all occurred when the economic outlook seemed grim. Three of the best months occurred in 2009 as the Great Recession raged on and another three took place during the COVID-19 pandemic. If you missed these months, then you could have put your returns in danger.
What to do instead of selling
Instead of selling all your stocks, now is a perfect time to invest more. With stocks and indexes at lower valuations, each dollar invested buys a more significant fraction of the underlying asset. By changing your investing mindset to recognize that market downturns are buying opportunities, you've reached a level of stability that few others have.
Because bear markets occur fairly often -- about once every 43 months since 1928 -- investors need to be prepared for them. However, they last less than 10 months on average, leaving the remaining 33 months for advancing markets.
Additionally, U.S. markets have always emerged out of bear markets to achieve new highs. While the recovery time varies during each bear market, eventually, it does happen.
So, to answer the question if you should sell, the answer is no. Not only will you miss the market top, but it's also challenging to get back in before the market moves up, as it often happens when you least expect it. Instead, now is a great time to buy stocks and hold them long-term. There are plenty of great values in the market right now; it's up to investors to scoop them up.
Source: fool
