In theory, investors believe they should buy when prices are low but rising and sell when prices are high but falling. However, when it comes to stock market timing, you must successful twice: Once when you buy and then again when you sell. Getting the maritimjatim.info timing right on both ends is doubly difficult. Plus, every time you trade, you incur brokerage fees and taxes, which can quickly reduce any additional returns you’ve gained on both the purchase and the sale.
Instead of trying to time the market, consider spending time in the market. You may find that a passive investment strategy, such as buy-and-hold, can help you gain long-term returns.
What is passive investing?
The overall goal of passive investing is to build wealth gradually. Also referred to as a “buy-and-hold strategy,” passive investors focus on a long-term plan and don’t profit from market timing or short-term market fluctuations.
What is active investing?
Active investing involves real-time buying and selling and is intended to build wealth quickly. An active investor, or portfolio manager, constantly monitors the stock market and trades shares when the opportunity arises.
What is a buy-and-hold investment strategy?
The buy-and-hold strategy is a popular long-term investment where you buy stocks and other securities and hold on to them regardless of changes in the stock market.
The following points help explain stock market investments and why buy-and-hold investing may be worth implementing:
1. Investments can grow despite market fluctuations
The U.S. stock market volatility can be intimidating — and while past performance is not a guarantee of future returns — history shows the market has been able to recover from declines and still provide investors with a positive return on long-term investments. In fact, over the past 35 years, the market has posted a positive annual return in nearly eight out of every 10 years.1
2. When to invest in stocks
A buy-and-hold strategy can help investors avoid missing out on the market’s biggest days.
The hardest part about choosing when to be in or out of the market is that missing a few key days or weeks of a five- or ten-year cycle can have a significant influence on your returns. Historically, a large share of the stock market’s gains and losses occur in just a few days of any given year. Since the pattern of returns isn’t predictable from month to month, a consistent long-term investment can add to your bottom line.
3. Potential to recoup losses faster
For most investors, a buy-and-hold strategy can result in quicker loss recuperation, even after a bear market when a major index like the S&P 500 falls by more than 20% from its recent high.
As an example, let’s say you invested $1,000 in the S&P 500 on January 1, 2008. That year, the S&P 500 lost 37% of its value.2 At the end of 2008, your investment was worth $630. Consider the differing outcomes depending on whether you used a buy-and-hold strategy or chose to reinvest $630 into a savings account with a 3% interest rate, compounded monthly.
4. Grow with compound interest
A buy-and-hold strategy can also help investors take advantage of compound interest. While past performance is not a guarantee of future returns, the S&P 500’s inflation-adjusted annual average return on investment is about 7%.3 This means, on average, the index’s value is 7% higher at the end of the year than it was at the beginning. These gains accumulate over time and can provide an advantage to those who start long-term investing early.
5. An early start vs. stock market timing
Investors often try to wait for the “right” time to start putting money into the stock market. But the longer they delay their investing, the longer they miss out on company dividends.
Don’t underestimate dividends. These individual payouts might seem small, especially when you’ve been investing for only a few years, but more than 40% of gains in the S&P 500 have come from dividends.2
As a stock market investor, you can choose to cash in your dividends as soon as they’re available, or you can opt to reinvest your dividends back into the market, manually or automatically.
