In my 30 years of experience as a financial adviser, I've often been asked about the stock market, particularly about timing. More specifically, I frequently hear, "What is the best time to buy, and when can I get a good price?"
Many appear shocked when I tell them, for the long-term investor, it's not about market timing. It's about patience.
I understand wanting to get a good price. We all want to get a good deal. But for the long-term investor, just being in the market is important. Allow me to explain with a few examples.
First, I like to separate the market into two categories: short-term investing and long-term investing. Anything less than 18 months is short-term; more than 18 months is long-term.
In the short-term, the stock market is an emotional beast. It is driven by emotions—fear, panic, greed and overreacting all determine the ups and downs of the short-term market. And it's unpredictable. This kind of environment can score big wins for investors, but it can also lead to huge losses.
The good news for investors is that fundamentals drive the long-term market. These fundamentals include revenues, profits, cash flow, a competitive landscape, innovation and the overall direction of the economy. These are the only factors that you should be concerned with as a long-term investor. A novel idea, I know. However, it's my opinion that many people don't think this way, and therefore they get caught up in the short-term ups and downs of the market.
Let's look at John, for example. John invested his money in Standard & Poor's 500-stock index in July 2011, which was consequently the worst possible time to invest since the financial crisis. Overnight, John lost 18% of his investments. This actually was the case for many in July 2011. If he'd lost his nerve at that point and gotten out, he'd have lost that 18% for good. However, staying patient, he kept his investments in the market. Today he has gained more than 70%. This is a good example of why market timing is irrelevant to the long-term investor.
Markets fluctuate. Investors have to be able to accept this simple fact. Since the end of World War II, we have had 29 market corrections in the S&P 500. However, over the last 50 years, the S&P 500 is up more than 11,000%. No, that is not a typo.
Despite news to the contrary, our economy is actually growing steadily. On a global scale, no one is as competitive as the United States of America. We are the world's largest economy without a close second. So the next time something like Ebola hits the U.S. or the government shuts down (both being distant memories that caused the market to drop), remember it is all just headline risk, and you need to look at the fundamentals.
Equities grow and compound over time because economies grow over time. Staying invested allows you to take advantage of compounded returns. This is one of the most amazing ways to create generational wealth. Small, boring gains turn into attractive long-term gains simply from compounding. Investing involves risk, but you shouldn't let volatility scare you out of the market. Stay strong; stay the course!