In the past decade, the S&P 500 index (SNPINDEX: ^GSPC) has produced a total return of 207% (as of April 15). So, for a $10,000 initial investment, the end result would have been $30,700 sitting in your portfolio today. That’s an outcome most people would be pleased to have.
Of course, the volatility can be scary. Times like now, for example, when the closely watched benchmark is trading 13% below its record, can test any investor from a psychological perspective. But there are ways to stay on course.
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In fact, perhaps the best thing investors can do is to protect the downside. And by that, I mean to avoid costly mistakes. Here are three things to keep in mind.
It makes sense why investors want to try to time the market. It’s all about navigating the ups and downs to avoid the worst days and take advantage of the best days. The problem, however, is that this is easier said than done. It could cause more harm to your portfolio than good.
A study conducted by JPMorgan Asset Management found that the stock market’s best days often don’t come long after the worst days. And had you missed the S&P 500’s 10 best days in the past 20 years, you would have ended up with less than half the total return than if you had stayed invested through the volatility.
You should prioritize investing early and often. It pays to focus on maximizing your time in the market to let the power of compounding take over. Dollar-cost averaging can help as well, since it’s almost like an automated method of allocating capital to the stock market.
We all want our portfolio balances to go up at a steady pace without interruption. But that’s just not how the stock market works. It’s a bumpy road where patient and disciplined investors are rewarded, not those aiming to get rich quick.
This doesn’t prevent investors from fixating on the short term — say, the next three to six months. The goal is to trade in and out of positions to boost returns. Overactive trading, however, can seriously hurt your portfolio’s performance.
Keeping focused on the long term is the right course of action, though it can seem like an impossible task these days. That’s because we live in a world with a 24/7 news cycle and access to free trading at our fingertips. This creates an environment where everything is mostly noise, with the firehose of information urging us to constantly want to take action. Avoid the itch.
