The Only Chart You Need To See To Invest Smarter Smart change: personal finance


(Justin Pape)

The stock market is like a daily loop of gut reactions – it goes up and down based on day-to-day news, events, and investor mood. Trying to predict daily highs and lows in stock prices is the first mistake many investors make.

But fear not, there is a way to build wealth in the stock market without stress or unnecessary headaches. Here is the success manual that any investor can use.

Zoom out for perspective

First, investors should realize that while the stock market behaves irrationally in the short term, it has been shown to be more predictable in the long term. Below we can see a graph of the S&P 500 over the past decades.

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The S&P 500 has seen dramatic and prolonged declines throughout its history during periods known as “bear markets”. Below are recent bear markets, noted by year they started and losses incurred during each period. Recovering from these losses can take months or even years:

  • 34% in 2020
  • 56% in 2007
  • 49% in 2000
  • 20% in 1990
  • 34% in 1987

These times were undoubtedly frightening as they happened. Investors probably wondered about themselves and the stocks they were holding with a lot of panic and cheap selling. But when we step back again and examine the long-term history of the S&P 500, even the worst dips are little more than minor dips on a chart that continues to rise.

In this context, investors must take a long-term view. We cannot control the short term ups and downs of the stock market, but we can be reasonably confident that the market will rise over time.

Image source: Getty Images.

Translate mindset into strategy

Many people are also trying to “synchronize the market”, waiting for the perfect time to deploy a lump sum to maximize their returns. This makes sense in theory, but most people drastically underestimate how difficult (practically impossible) it is to do it consistently.

Remember, the stock market is like a knee-jerk reaction on any given day – how can you predict what it’s going to do tomorrow or the day after? You’re no better off than just walking into a casino and putting your money on red or black at the roulette table.

The truth is, trying to time the market is a great way to mess up your total returns. If you wait for a big crash to invest your money, you will also miss out on many days when stocks are making big gains. However, only the 10 best days of the market are missing over 20 years could cut your returns in half.

One strategy to counter the temptation to time the market is average purchase. You invest small amounts little by little. The result is a gradually growing portfolio, built up at a wide range of prices that reflect the market average.

It eliminates the stressful judgments you otherwise have to make since you buy at regular intervals. A study of Charles Schwab explored how different investment strategies performed from 2001 to 2020, and he found that Average Dollar Costs (DCA) produced total returns at less than 11% of someone who Perfectly the lowest in the market timed each year.

The best way to follow the market

You can easily follow the market using exchange traded funds (ETFs) built to mimic major indices like the S&P 500. Investing in index funds with little to no expense ratio means you avoid giving your returns to fund managers.

A good example is the Vanguard S&P 500 ETF (NYSEMKT: VOO), which began trading in 2010. It is constructed from a combination of large cap and value stocks to mimic the makeup and behavior of the S&P 500. Its expense ratio of 0.03% means that A position worth $ 10,000 in the fund costs only $ 3 per year. It also pays a dividend that pays 1.2% on the current share price.

If investors can’t stand the idea of ​​paying management fees, the Fidelity ZERO Large Cap Index Fund does not charge any fees. It also follows a collection of the largest companies in the market, similar to the S&P 500 focused funds, although “S&P” is not in the name.

These low cost funds are great tools for investors who want to use a DCA strategy to build their long term investments in the stock market.

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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Justin pope has no position in any of the stocks mentioned. The Motley Fool owns and recommends the Vanguard S&P 500 ETF. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.


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