After about ten months of decline following Russia’s invasion of Ukraine and growing fears of a US recession, a 2023 rally has helped stocks recover some ground. The S&P 500 is up about 25% since October 13, 2022, when the index reached its most recent low of $3,491.58.
Wherever the market heads in the next month or year, there’s one way to ensure you never miss out on another bull run in the stock market.
Patience, And Time In The Market
The stock market has its ups and downs — stocks will be stocks.
In the short term, market fluctuations can be dramatic and nerve-wracking. It requires a certain level of fortitude to watch your portfolio tumble for months on end without pulling your money out of the market, let alone continue buying stocks. But panic selling is one of the main reasons retail investors consistently underperform the markets.
According to Darnall Sikes Wealth Partners, average investors too often buy when markets are high and sell when markets are low. Between 2000 and 2020, everyday investors saw annualized returns of 2.9% compared to the S&P 500’s 7.5%. The S&P 500 outperformed average investors by more than double, and it’s largely because of investor behavior.
Investors are impatient and often jump in and out of investments in an effort to time the market, whether they’re chasing profits or pulling the ripcord when losses continue to mount. They don’t have the patience to stay invested for more than a few years, which is not nearly enough time to weather the volatility in the markets.
Successful investors need to be patient. Investors who are patient enough to stay invested and wait out market turmoil and market downturns are typically rewarded. According to CNBC, the market’s best days tend to follow its largest drops.
Market trends can change suddenly and without notice, making it extremely difficult to predict a downturn or rally. And missing just a handful of the market’s best days over long time periods can drastically reduce your portfolio’s average annual returns.
By missing the market’s 10 best days over the past 15 years, you would have earned 5.52% less than someone who stayed fully invested. That’s a difference of $19,215, assuming a $10,000 investment in the S&P 500 in 2007.
While no one can predict the market’s short-term movements, the long-term performance of the stock market trends upwards over time. The return on the S&P 500 since its inception in 1923 through December 31, 2022, is 1,875,113.40%, or an annual return of about 10.34% per year. A $100 investment in 1923 would have yielded about $1.9 million at the end of 2022. Patience and staying invested through the market’s worst days is how every investor can profit from the market’s next bull run.
Track The Stock Market With Index Funds
According to billionaire investor Warren Buffett in a 2017 letter to shareholders, “both large and small investors should stick with low-cost index funds.” Buffett owns two himself.
Active fund managers charge fees that end up lowering your returns, and most active fund managers don’t have a great track record when it comes to outperforming the market. Standard & Poor’s S&P Indices versus Active (SPIVA) report indicates that a majority of actively managed US large-cap equity funds have underperformed the S&P 500 consistently for at least a decade.
A report by American Enterprise Institute (AEI) puts this number close to 95%. According to AEI, around 95% of finance professionals can’t beat the market.
Market indexes tend to rise over time, while individual stocks are more susceptible to unexpected ups and downs. Passive index funds also charge fewer fees, and this difference can have a significant effect on investors’ returns when compounded over time.
If you’ve been on the sidelines during this 2023 stock market rally, now’s the time to get involved. If you’re a long-term investor, it shouldn’t matter what the market does in the coming months or over the next couple years. Get invested and stay invested so you that you can benefit from the next stock market bull run.
__About the Author
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Matt Miczulski is an investments editor at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
