This Simple Investing Habit Will *Almost* Guarantee You Great Returns
Want to listen to this post instead of reading it?
Listen to the Run Your Money Show on Apple Podcasts!
Listen to the Run Your Money Show on Spotify!
Recently, on one of my videos on TikTok, someone commented, "Who's making money in the stock market right now? Asking for a friend."
She started investing in 2021, right before the stock market went down the pooper. (A technical term my husband and I use when referring to the stock market not doing great.)
I've said this before and will say it a hundred more times. Investing is emotionally challenging because you can log into your account and see a number. You can see how much money you've gained, which might be fun and exciting. You can also see how much money you've lost, which can be fear and anxiety-inducing.
That's why people think other investments like art, jewelry, or real estate are safer. Those values can fluctuate, too, but no one is coming to your house every day and knocking on the door, telling you how much your house is worth. You only care about how much your home is worth when you want to sell it.
The same thing is true with the stocks you might have in your retirement. You only care how much it's worth once you need to sell it. But you can see the ups and downs more easily than in your house. It can create a lot of fear, and from that fear, not-so-great actions you can take.
So you see this volatility and hear how people stay in all cash until the stock market settles down or put their money elsewhere. This can make you feel like you're doing something wrong so that you get out of the stock market, don't invest at all, or worse, invest in truly risky things.
I think this also gives the illusion that investing is complicated, time-consuming, and you must understand and execute strategy.
None of that is true.
Here's the only investing habit you need, whether the economy is up or down: continue your monthly or quarterly contributions to your investments.
The worst thing you can do is try to time the market.
When you hear people say things like...
"I'm staying in cash."
"I'm putting all my money in real estate."
"I'm putting all my money into this one stock or sector of the economy."
...What they're doing is constantly buying and selling in hopes of avoiding any downturns in the market.
But as history has shown, that is the worst thing you can do with your money.
The only people who succeed in that are unicorns- someone's ability to time the market well is largely luck.
People will tell you they can predict the market or are better than the "average." But the truth is, is that they've just had better luck.
When it comes to my retirement money and my nest egg, I'm not willing to rely on luck to grow that money.
If you invested $10,000 in the S&P 500 on January 1st, 2003, and left it there, meaning you did not try to time the market at all, by the time December 30th, 2022, rolled around, you would have almost $65,000.
Let's say you put $10,000 into the S&P 500 on January 1st, 2003. But they would try to be savvy, and they wanted to time the market. So they would take the money out when they thought the economy was going down and then put it back in when it went up.
In doing that, they miss the ten best days of the market between January 1st, 2003 and December 30th, 2022. By only missing ten days on December 30th, 2022, their $10k investment is just under $30,000.
Their returns have been cut in half by missing the best ten days of the market. Ten! If someone misses the best 20 days, that $10,000 is only under $18,000. If they miss the best 30 days between those 20 years, then their $10,000 is only just under $12,000, and so forth.
You lose money once you start missing the best 40, the best 50, and the best 60 days.
Someone might say, "Okay, fine. I'll just take it out when the economy's bad. And do better at not missing the best days."
But here's the thing. Six of the seven best days happened after the worst days. The second-worst day of 2020, March 12th, was immediately followed by the second-best day of the year.
It doesn't seem to make sense, right? But look at it this way:
In mid-March 2020, the economy was shutting down because of COVID-19. Not surprisingly, the stock market went down with it because people just assumed there would be a profound recession due to the pandemic.
But when things go far down, there's also more room for things to go far up. This is why some of the best days often occur around some of the worst days in the stock market. And this is hard, if not impossible, to predict.
It's also hard to separate your emotions. Again, you can open up your retirement account and see a 20%, 30%, or even 50% dip in your investments, get scared, and make rash decisions from that fear.
This is why humans typically cannot time the stock market successfully or reliably.
So, yes, your investments will see a dip at some point.
In fact, according to a great investing book, Just Keep Buying, the author says you should expect to see a 50% plus price decline a couple of times a century, a 30% decline once every four to five years, and a 10% decline at least every other year.
You might think, "What the hell?! This is terrifying. Why would I be investing my money in the stock market?"
I'll tell you why this is actually a good thing.
Imagine you buy a stock for $10 and have a monthly recurring transfer from your bank account into your investment account that keeps purchasing the stock for $10.
Let's say there's a downturn, and you decide to listen to Veronica and keep investing that $10 each month.
But the stock you've been buying for $10 has dropped $5. That's a 50% drop, so you'll likely see a significant decrease in the overall value of your account.
You realize each share is only $5 instead of the regular $10, so you can buy two shares instead of just one.
Then, the stock returns to $10 because the economy has recovered. You bought two shares for $5 each, but now you own two. They're worth $10 each. Totally $20, but you had only spent $10.
You, my friend, have just doubled your money. This is what people who try to time the market dream of.
This is why staying in the stock market, especially when the stock market is down, is so important. Think of it as buying stocks on sale; you're going to be able to buy more shares when there's a downturn.
When the economy and the stock market recover, your overall value will go way up because you own many more shares.
There's so much to be gained when the stock market is down, and it's why just missing those ten best days of the stock market cuts your returns in more than half.
What about professional wealth managers? Can they time the market better?
The answer is still no.
According to Wealth Watch Advisors, an investment firm, a buy-and-hold strategy of $100k earning S&P 500 returns did better in every time period measured when compared to someone managing a similar portfolio.
As I was putting together my investing class, a block that I had was believing I don't need to teach this because investing is SO easy. Don't people already know this?
It is easy to invest, but the information overwhelm is real. And it's easy to believe investing is more complicated and time-consuming than it is.
The best thing you can do is set up a simple portfolio with low-cost index funds with a monthly recurring transfer. That's it!
Don't worry if the economy is doing well or not. Don't worry when the news anchor says, "The Dow Jones lost 30 points today."
None of that matters!
Feel free to keep up with the stock market and financial news if it interests you, but feel no pressure to keep up with it as an investor. When the economic winds change, you do not need to change your investing strategy.
I'm excited about my upcoming investment class, Everything You Need to Know About Investing, because it can be pretty straightforward.
The goal with my upcoming class is that you'll have an investment account either set up or optimized by the end of class.
I'll show you how your investment can be hands-off or a bit more hands-on IF that's what you want to do.
Not investing or having someone else manage your investments will cost you tens of thousands, if not more.
Here's what I'll teach you in class:
The pros and cons between taxable and tax-advantaged investment accounts (like Roths, 529s, etc.)
How to choose which investment accounts are right for you based on your goals and life circumstances
How to pick your investments and build a lucrative yet low-risk and low-cost portfolio
When to sell and actually enjoy your moneyWant free money advice in your inbox every week?
Subscribe to my Run Your Money Newsletter for free money tips and tools to help you run your money better in your relationship, with kids, and more!
