With news of the collapsing sub-prime mortgage market and worries that the market’s over-valued, many analysts in the financial news media are running around like Chicken Little proclaiming that the market’s going down and you should get out while you still can to safer and more liquid positions. It’s true that the market’s going under some sort of correction right now, but does this mean you should take your money out and cut your losses? Absolutely not!
It’s a pretty safe bet that two or there months from now the market’s going to be a somewhat lower than it is now, but that’s part of investing in the stock market. Short term it can be quite volatile. There can be some pretty dramatic rallies and plunges in the market. Recently the market was down 300 points in the morning and at the end of the day, it was up 14 points! These types of things are going to happen. We shouldn’t head for the hills and put all of our money into certificates of deposit and money market funds just because there are storm clouds on the horizon.
If you take your money out right now, when are you going to put it back in? What’s the indicator that it’s going to be the right time to put your money in? Is it when the market hits rock bottom? If so, how do you know when that happens? The reality is that timing the market just doesn’t work. Chances are you won’t put your money back in until the market has already made significant gains again, and you’ll have already lost out on much of the gains that were to be had. That’s what most people who sell their shares to avoid potential losses end up doing, it’s called buying high and selling low. It just doesn’t work.
Chances are there’s some turmoil in the stock market for the next few years, but we do know this. Out of any 10 year period that the stock market has existed, there has not been a single time when you would have lost money if you had invested in the S&P 500. Out of any 5 year period, there’s still a 97% chances that you’ll come out ahead. Over a long period of time, the stock market is a great investment. It’s not uncommon to find mutual funds that average 11% or 12% annual rates of return over a long period of time.
Of course there are going to be some short term fluctuations in the market, and those are bound to happen. Trying to guess when to put your money in and out of the market is nothing more than gambling. You don’t have any special knowledge to know what the market’s going to do in the near future, but you do know that it’s going to do well over a long period of time, so it makes sense to leave your money invested and keep investing even if there are some financial storm clouds approaching.