History Says Investors Who Make This 1 Move During Bear Markets Always Win Out
When stock prices are falling, investors usually react in one of two ways. They decide to move to cash and wait for things to get “better,” or they consider buying the dips. The problem is that both strategies require you to make a prediction, and predictions are often wrong.
Investors can’t predict the future, so there’s really no sense in even trying it. Staying the course regardless of what the market’s doing in the short term is usually the best thing to do. That includes keeping your automatic investments right on schedule.
Buying the dip is harder than it sounds
Unfortunately, many investors react emotionally to market developments. They see their investments declining in value, and their instinct is to stop the bleeding before it gets worse. The problem is that nobody knows exactly the right time to get in or out.
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Investors usually sell only after losses have already occurred, and then buy back in only after the rebound is well underway. In either case, it usually ends up damaging long-term returns.
Buying the dip can seem wise in practice, but it still carries risks because it requires you to pick an entry point. If you overthink it, you might wait too long or not long enough. Either way, it requires you to decide what the best time is to trade.
The best idea, as it turns out, might be to do nothing at all.
Keep your regular investments on autopilot
Whether it’s into a workplace retirement plan, such as a 401(k), or just a regular brokerage account, maintaining your automatic investment schedule is the best way to take advantage of volatile markets.
It requires no timing, no market watching, and really no action whatsoever. Continuing to invest at regular intervals allows you to buy the dips whenever they occur or accumulate long-term wealth when stock prices are near highs. Fixed contributions help lower your overall cost basis and improve your overall returns.
Some of the best options for this strategy are the Vanguard S&P 500 ETF (VOO +1.28%) or the Vanguard Total Stock Market ETF (VTI +1.27%). But really, any diversified equity or fixed-income fund is ideal for this. The key to success is avoiding the temptation to time the market and pick your entry and exit points. By focusing on long-term wealth accumulation instead of short-term market machinations, you have a much greater chance of riding out and even taking advantage of bear markets when they arrive.
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David Dierking has positions in Vanguard Morningstar Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.