Over the last decade, we’ve enjoyed one of the longest bull markets we’ve ever seen. In the last few years, the stock market has set record after record, climbing higher and higher.
And in those last few years, there have been people at every turn claiming that the next big crash is inevitable.
Yet the stock market only continues to go up and up and up.
This is a good indication that asking “when will the stock market drop?” isn’t the right question. We know that we’ll experience a market downturn again. But, no one can reliably predict exactly when that will happen.
Timing the Market Relies on Speculation, Not Certainties
It’s only natural to feel a little nervous about what the stock market may or may not do in the coming months. But that doesn’t mean you need to give in to emotions and react based on those feelings.
Here’s what you need to know: there is absolutely no way to predict what the market will do next. Anyone who thinks they can do it is speculating. And just like with gambling, sometimes they’ll be right and sometimes they’ll be wrong.
These speculators believe they can time the market. And the problem with timing the market is that it can set you up to make an all too common mistake that can sabotage your efforts to build wealth: buying high and selling low.
Timing the Market Isn’t Necessary When You Rely on a Long-Term Investment Strategy
With a properly constructed portfolio built specifically for your risk tolerance and time horizon, there is no reason to panic when the stock market drops.
“Losses” are not realized until you sell. And if you sell when prices are low, there’s no chance for those unrealized losses to swing back to unrealized gains when the market trends upward once more.
So stay in your seat if you’re investing for the long-term. Give your portfolio time to ride out market volatility, and stay invested so you actually have the opportunity to do the right thing: buy low and sell high.
If you’re still not convinced, check out this excerpt from a Business Insider article I wrote covering the same topic of timing the market (and why it doesn’t work).
Let’s imagine that you only bought into the market right before every market crash of the last few decades… but you never sold your positions in your portfolio.
In other words, your timing for investing into the market sucked — but the thing you got right was to stay in your seat and let your money ride out the market ups and downs over the long-term.
What would happen? Here’s your answer:
Meet Bob, the “World’s Worst Market Timer.” Bob is pretty much your worst nightmare if you’re sitting on cash thinking “I’ll wait to invest because I don’t want the market to crash right after I contribute to my portfolio.”
From 1972 to 2007 he only invested in the market in the months before major market crashes:
- in 1972, right before the market fell almost 50% in 1973
- in 1987, when it crashed again and lost 37%
- right at the end of 1999 just in time to see the market lose almost half its value again
- in 2007, when the Great Recession delivered a 52% loss
Surely, Bob is broke, destitute, and living in a cardboard box on the side of the road thanks to his awful decisions about when to invest — right? You might think so, but you’d be wrong. Remember: It’s not about market timing. It’s about time in the market.
In this scenario, Bob invested $184,000 in cash from 1972 to 2007. And what did he end up with in 2013? $1.1 million.
While Bob invested at the worst possible times, he never sold any of his positions. He never pulled his money out of the market.
If you wonder what happens if you invest cash right before every major market crash throughout your working career… the answer is you’d still be a millionaire if you stayed in your seat and didn’t sell out.
(Another look at Bob’s situation, by the way, showed what would have happened had he used dollar cost averaging instead of trying to time the market. Had Bob done this with his $184,000, he would have turned it into $4.4 million.)
Rather than worrying about market timing, focus on setting up a systematic way to invest money so you make strategic, rational decisions, and not falling victim to cognitive and emotional biases that cause you to make silly investment choices.
Growing Your Wealth Means Investing Objectively Over Time
There’s a reason I work together with my clients to create a comprehensive financial plan that goes far beyond investments. We look at a comprehensive financial plan in order to:
- Strategize how to allocate financial resources to enjoy life today while still planning for the future.
- Develop action plans to achieve short term goals today, in the next 12 months and 5 years down the road, and also long term goals 10 or more years into the future.
- Make rational decisions about how to invest for short-term goals and long-term needs (like retirement).
- Understand all your options so you can choose how you want to use your money — because the most important thing is using your resources in a way that allows you to create the life you really want to live.
The money we put in the market is money clients aren’t looking to use in the next several years. They know they can take advantage of time.
When a market downturn happens — as we know it will, we just don’t know precisely when — they can retain peace of mind around their finances.
They understand that, at a minimum, their investments can stay put for at least 5 years (but more likely, they’ll stay invested for 10, 20, or even 30 years).
That’s an abundance of time to ride out the market and enjoy the benefits of dollar-cost averaging.
Growing wealth is a long-term process. Over decades of saving and investing, you will see the market swing back and forth. It’s how we react to those swings that makes all the difference.
Plan for Bull and Bear Markets So You Can Stay Invested Through Both
No one — not your coworkers, not the media, and not even your advisor — knows for sure what the market will do next. But what I do know is that the market will go up, and it will go down.
This is why I work together with my clients and help them plan for those ups and downs. I create investment portfolios that are well positioned to take advantage of long-term stock market growth.
That means we also need to buckle down and ride out the volatility that is inevitable over the short term.
I know watching the market jump around or listening to talking heads saying a correction is certain to happen soon can make anyone feel nervous or worried. I get it because I have those same emotions.
And when those come up for me, I look to my financial plan.
I consider the fact that the money I invest is money I want to use 5, 10, or even 20 or more years into the future. And that means market fluctuations, and my feelings that go along with them, are going to be completely irrelevant in a decade.
The anxiety and stress may still be there. No one likes seeing the market take a tumble. But I remind myself that no one can reliably predict or time the market to avoid the downward swings.
I also remind myself I’m investing for the long haul — and you should be, too.