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Seen from the outside, investing seems like a tedious task. There are countless websites, print publications, and television programs devoted to the issue, and as a group they may inadvertently send the message that constant action is the key to success in the stock market.
Nothing could be further from the truth. For most investors, the best thing to do is to do nothing but just sit on your stocks.
This is a hard truth to digest given how much noise the media manages to generate. By taking a big step back and looking at the big picture, however, the premise becomes quite obvious.
Image source: Getty Images.
Time heals all wounds
The simple image below says it all. It’s the S&P 500 index dating back to 1928, plotted in a logarithmic format just for ease of inspection. As you would expect, there is the constant ebb and flow of the market. The Great Depression crash of the late 1920s and early 1930s is fairly easy to spot, as is the dot-com crash of 2000 and the liquidation caused by the subprime mortgage collapse of 2008. Market students with Good Eyesight may be able to distinguish a few other stumbles like Black Monday in 1987.
Data source: TradeNavigator. Chart by author.
However, there is a much bigger point to take from this chart than the fact that stocks suffer an occasional setback. The point is so obvious, in fact, that it’s easy to look just beyond – the forest is missing for all the trees, so to speak. Simply put, stocks eventually got over each of these stumbles and rose to higher highs.
Each. Single. Time.
Granted, in many cases it took a while. Three times since the Great Depression stock market crash, the S&P 500 has been lower than 10 years earlier. These cases occurred shortly after the subprime mortgage crisis, through most of the 1970s and into 1947, when the world was still regrouping after World War II. Not once since 1946 has the S&P 500 fallen over a 15-year period.
This is good news and bad news. This is good in the sense that investors can take comfort in knowing that the stock market is resilient. This is bad news, however, as few investors think of 10- and 15-year time frames. We have developed a bad habit of looking at stocks as 10-month or 15-week holdings, if that’s the case. It’s a hard habit to break.
Breaking this habit would be in the best interest of most people, however, in light of other information.
Market timing is just hard to do
Most actively managed mutual funds don’t outperform the overall market.
For anyone unfamiliar with the term, active management refers to the (relatively) frequent buying and selling of stocks in a constant effort to maximize returns. Fund managers of all types do this, as do individual investors. However, most don’t do this very well, despite having access to data and tools specifically meant to equip these title pickers with top-notch tools.
Standard & Poor’s updated their calculations last year, finding that over the past 10 years, 97% of actively managed large cap funds have failed to keep pace with the gains of indices and funds like the S&P 500 Index Fund (NYSEMKT: SPY). They also haven’t done much better over 15-year periods: 92% of large-cap fund managers have followed the performance of the market over that period. Actively managed mid-cap and small-cap funds did a little better than their large-cap counterparts, but most still underperformed their index benchmarks. Ditto for international funds.
This is not to say that investors should not own individual stocks with the intention of beating the market over time. But the numbers illustrate an important point. Simply put, frequent stock trading can easily do more harm than good. Even the pros aren’t very good at timing entries and exits. Most of them – like most mom-and-pop investors – had better leave their stocks alone, take a few bumps, and let time do its job. The biggest job of an individual investor is simply to remember that “time” can mean 10 years or more.
If you don’t have that kind of time, that’s okay. But you need to adjust your strategy to one that is less dependent on growth stocks and more dependent on less volatile instruments such as bonds or other income-generating securities.
Leave it alone
Most investors naturally know these things, but it is easy to get distracted from them. This is because the media have mastered the art of convincing investors, everything matters as long as it gets reported. This in turn can lead to bad business decisions.
Don’t take the bait, especially if the suggestion is to cash in your holdings after a massive sale. The timing of the market is incredibly difficult. Rather, let time do the repair work it always does with established companies.
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