When the stock market hit record highs earlier this month, you were probably thinking one of two things…
You were either saying, “Is now the time to take all the cash I’ve got sitting on the sidelines and jump in?”
Or, alternately, you were maybe wondering, “Is now the time to take some chips off the table? We’re probably going to have a correction from here and the market is likely to decline by at least 10%.”
The classic investor’s dilemma
This binary thought process gets at a classic investment dilemma: We love the new highs that the major indexes (Dow Jones, S&P 500, NASDAQ) are scaling. But we know things can’t go up forever and we fear the inevitable crater.
So what should you do?
Here’s the reality: You’ve got to be in it to win it. It may sound cliche, but it’s true.
Check out this chart below from Charles Schwab. It shows what would happen if you had $10,000 sitting on the sidelines in cash at different points in history and suddenly decided to get invested.
But the chart goes further than that. It actually shows you what would have happened to your money if you put it in the market under one of two conditions — either at the peak when values were at their highest or during the trough when stock values were crashing down around investors.
Since it’s probably freshest in your mind, let’s take a look at the numbers for the Great Recession.
If you had thrown $10,000 into the market right before it crashed, your $10,000 would still have grown into $15,768 by 2015. Not too shabby!
If, on the other hand, you actually managed to time the market correctly and bought right after the crash…you’d have $29,557!
But here’s the real caveat: What would happen if you sat it out and stayed in cash because you feared market highs and lows? Schwab’s numbers show you’d have only $10,261.
So to sum it up, stocks — even during an epic extended period of failure — beat cash by 54%.
Those are some powerful numbers. Look closer and you’ll see the trend only magnifies the further back you go in history.
The point is you don’t have to time the market to be successful at investing. As the saying goes, time in the market is more important than timing the market!
Keep this investing advice in mind
Money expert Clark Howard talks about four strategies you can use to help you maximize your experience as an investor.
Keep your expenses low
Clark is fierce about keeping costs low when you invest. That’s why he loves a litany of discount investment houses.
Be sure you are dollar cost averaging
Dollar cost averaging is a fancy way of talking about contributing set amounts of money on a set schedule — as you would through your employer’s 401(k) plan.
Let’s say you do have that hypothetical $10,000 sitting on the sidelines that Schwab referred to in their chart. Then putting it in the market in equal contributions of maybe $2,500 or $2,000 or even $1,000 over the course of several months would achieve the aim of dollar-cost averaging.
Have a diversified portfolio
You never want to put all your eggs in one basket, right? Diversification, on the simplest level, means spreading your money out among both domestic and international investments and both stocks and bonds. The theory is that losses in one area can be balanced out by gains in another.
Dull is an investing mantra for the ages. As a general rule, Clark prefers that you own plain vanilla index funds. These kinds of investments owns tiny slices and dices of hundreds or thousands of publicly traded companies. So you don’t have all your money in just one company!