Over the past 20 years (through 2019), the S&P 500 has generated annualized returns of just over 6%. Meanwhile, the average equity fund investor has achieved returns of just 4.3% per year, according to Dalbar’s latest Quantitative Analysis of Investor Behavior (QAIB). This is the difference in turning a $100,000 investment portfolio into about $230,000 or $322,000 over those two decades.
Some of this difference has to do with investment fees, but the biggest reason for the difference is over-trading. Humans are emotional beings. When stocks are soaring, we see everyone else making money and push all of our chips into the middle. Conversely, when the stock market is crashing, it’s human nature to want to “get out before things get worse.” It is common knowledge that the central goal of investing is to buy low and sell high. But our instincts compel us to do the exact opposite.
The point is that trying to time the market when it comes to buying or selling is a losing battle. There are certainly some good reasons to sell, and I sell stocks every so often. But buying or selling stocks simply based on what the overall stock market is doing isn’t a winning long-term strategy. If you’re worried the market is too expensive, dollar-cost averaging is a strategy to try. And if the market is crashing, think of it as a good time to add shares of excellent companies for the long term.
It’s certainly possible to double your money in the stock market over short periods of time. Just ask anyone who has invested in big tech stocks over the past few years. And if it happens, great. But don’t swing for the fences in an attempt to get rich quickly.