Expensive fun: market timing
$ome thoughts on why you shouldn't sell scared
I'm a bit of a money nerd. I run a tiny private slack for folks interested in personal wealth (some folks call it personal finance, which feels too MBA for my taste). I love learning how folks save, invest, and think about their money in general.
One common belief drives me nuts: that you need to sell your investments before the stock market "tanks." I get the impulse. Folks don't want to see their net worth go down. They also believe that they can repurchase their investments when they're cheaper. Money nerds call this market timing.
Very few people have any skills in timing the market. You can find lots of research demonstrating it. Even professional investors working for large firms rarely beat the performance of the dumb old S&P 500 index.
Take the current COVID-19 market. Many folks sold their investments in March, for a massive loss from the peak. They may have sold for a profit, which may mean they will owe taxes for the trade. Many of those same people are still sitting on cash today, missing out on an all-time stock market high.
Also, few folks realize that dividends make up a large portion of stock market returns. Here is what Jack Bogle said in his excellent Little Book of Common Sense Investing:
"In fact, since 1926 (the first year for which we have comprehensive data on the S&P 500 Index), dividends have contributed an average annual return of 4.2 percent, accounting for fully 42 percent of the stock market's annual return of 10.0 percent for the period."
Jack Bogle, by the way, is an index fund super-hero.
If you're investing for the long term, I like to buy and hold my investments. Why would I want to risk paying taxes, mistiming the market, and missing valuable dividend payments? *
*I am not offering you personalized financial advice. Investing is risky**, so educate yourself on the topic.
**Sitting on a pile of FDIC insured cash is risky too! Note that the inflation rate is generally much higher than any bank rate you'll find these days.