About two weeks ago the S&P 500 reached record highs and naturally the usual doomsayers said it was high time for the next rout. And sure enough, the market took a sickening plunge last week and gave up pretty much all its gains for the year. So what should you do?
If you're a small investor, chances are you're going to have a hard time resisting the urge to get out before you "lose all my money." And many people will do exactly that. Which is why over the last 70 years or so, the stock market has averaged a 10% annual gain, while investors were lucky to average 3%. That's because they were trying to time the market and ended up selling at when prices were at their lowest and not getting back in time to fully benefit from the next bull market.
Do not try to time the market.
Look, I feel the same way you do when the market goes through a periodic plunge. I stay awake at night, get that sick feeling in my stomach, snap at family members and moan that I'll never retire. But one thing I never do. I never sell when the market's down. I know enough about investing to never lock in your losses if you don't have to.
I didn't sell in 2007 and 2008 when the S&P lost half its value--and now 6 years later not only did my investments recovered, I'm ahead of the game and have nearly enough to retire. I'm not a genius investor, but I do understand long-term market trends, the importance of asset allocation, and to build a strategy based on your goals and time horizon, not on market behavior. And it's worked for me over the past 25 years.
In other words: DON'T SELL NOW!!!! This is a routine correction--there's nothing happening in the economy that indicates that we're on the brink of a major recession or depression. Turn off CNBC and watch reruns of Big Bang Theory, read a book about boat building...or something.
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