Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation.
Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
The one thing that’s fully predictable about the stock market is volatility. With this volatility comes the habit of looking back and thinking about how much money you could’ve made (or saved) had you made certain investment moves before a particular rally or down period.
The S&P 500 — which is often used to gauge the overall health of the stock market — has seen more than enough volatility in the past few years to leave many investors wondering what could’ve been. This year hasn’t been any different: After climbing 20% through July, the index is down over 9% since then.
If recent swings are causing you to question whether now’s the right time to invest, there’s one chart that can answer your question.
One of my favorite investing quotes is: “Time in the market beats timing the market.” It sounds simple, but it’s powerful when you realize just how true it is.
To get some perspective, let’s imagine someone invested $10,000 in the S&P 500 on Dec. 31, 2007, and left it there until Dec. 31, 2022. Here’s how the value of that investment would look based on how many of the S&P 500’s best days (defined by single-day price movements) were missed.
Data source: Putnam Investments.
Even missing just 20 of the S&P 500’s best days — out of 3,780 total trading days — resulted in losses over that 15-year period.
In the interest of fairness, an argument could be made about the differences in value by missing some of the S&P 500’s worst days, but that goes back to the difficulty of timing the market. You may be right a few times, but timing the market correctly and consistently over the long term is all but impossible.
Investing consistently is much easier when stock prices are rising versus falling. If you can easily imagine the money you invest today will be worth more in the near term, of course you’d want to invest it as soon as possible. Unfortunately, the stock market is far from predictable over a short time horizon, and that’s what makes attempting to time it a fool’s game.
One strategy to avoid the temptation is dollar-cost averaging. When you dollar-cost average, you put yourself on a set investing schedule and commit to sticking to it, regardless of how the market is moving at the time.
For example, if you commit to investing $500 monthly into the S&P 500, you could decide to invest $250 every other Friday or $125 every Monday. The frequency of your investments doesn’t matter as much as making sure it’s a schedule you can stick to.
You’ll inevitably invest when stocks are overvalued and undervalued, but the most important part is remaining consistent and spending as much time in the market as possible versus waiting for the “ideal” moment. As the above chart shows, missing just a few key days can be very costly.
Stefon Walters 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.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Making the world smarter, happier, and richer.
Market data powered by Xignite and Polygon.io.