Even if you’ve only been an investor for a few days, you certainly already know this: stock tips are never short. Whether buying, selling or holding, financial experts always have an opinion for you.
They can also be a bit aggressive with those opinions, suggesting that you immediately act on their advice. It would be easy to conclude that you are supposed to trade frequently if you want to have any chance of outperforming the market.
However, nothing could be further from the truth. Leaving her wallet alone for months, or even years, is the real secret to success. That’s because you’ll never guess the next big market move. The best thing you can do is stand your ground, trusting that quality stocks will ultimately reflect broad economic growth.
you’ll never see it coming
That is an argument that not everyone agrees with. Some investors (and newer ones in particular) are very active because it feels productive to exercise total control over a portfolio.
But this strategy ignores a key market reality: You can’t predict how it will perform on any given day, yet the majority of total net gains in any given year occur around its 10 highest bull days. If you miss many, most, or all of those unpredictably bullish days, you risk missing out on significant gains.
Look at the daily earnings from last year: The S&P 500 (^GSPC 0.03%) it rallied 1,010 points for a gain of 27%. However, if you remove the top 10 days from that, the S&P 500’s full-year gain drops to a mere 7%.
And 2021 was not a fluke. The Putnam Mutual Fund Company found that investors who missed the top 10 market days from early 2007 through the end of 2021 would have enjoyed less than half the 456% gains that other investors enjoyed simply by staying in the market and taking advantage. rough patches.
And to be clear, that’s just missing the top 10 days over the entire 15-year period, and not the top 10 in each of those 15 years.
There is still a counterargument to be made. Missing out on the worst market days can save you from losing. If he could avoid the 10 worst days of last year recorded by the S&P 500, but could somehow be in the market every other day, his 27% gain would jump to 49%.
But realistically, the chances of being out of the market on its worst days and being in the market on its best days are terribly slim. Research by the Hartford mutual fund company indicates that half of the S&P 500’s biggest daily gains came during bear markets, when they were hardly expected. Furthermore, more than a third of the market’s biggest daily gains during that time came during the first two months of new bull markets, long before most investors are willing to step in.
Do less, get more
It’s hard to be sure. People are psychologically programmed to avoid pain and seek gain. Taking action, any action, helps us feel like we are doing it.
But that’s not what we’re doing when we buy and sell too often. If anything, given the tendency of most people to make ill-advised buying and selling decisions when stressed rather than cool-headed, such an approach often ends up hurting results rather than boosting them. And none of us can foresee the most important days of the market.
The point is: Less is more. We’re much better served by simply leaving our portfolios alone and taking our occasional short-term bulges, knowing that time will eventually deliver the kind of returns we’re looking for.
james brumley has no position in any of the mentioned stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.