Don’t try to time the stock market

If you’re worried about sudden drops in the stock market, you’re not alone. Many South Florida investors wonder about their investments when they see headlines like, “Dow Jones Average Plunges 500 Points,” or “Tech Stocks Take a Beating.”

While the potential for losing money is always a concern, your investment decisions should be based on sound thinking rather than raw emotions. Otherwise, there is a risk of making a costly mistake in that could have long term financial ramifications. For instance, the Wall Street crash of 2008 resulted in a 37 percent drop in the S&P 500 index for the year. But if you sold your stocks at the bottom of that market cycle, you missed out on a 26 percent return in 2009 and another 15 percent in 2010.

When looking at the stock market, it’s good to remember that you don’t make money or lose money until you sell your current holdings. If you are investing for retirement, that could be many years in the future. In that case, the daily ups and downs of the market may not be a big concern.

A historical perspective

Over the past few decades, stocks have generated higher returns than many other types of assets. From 1990 to mid 2018, the S&P 500 generated an annualized total return of nearly 10 percent. But there were plenty of daily ups and downs. If you missed the 15 best days, your annual return dropped to 6.4 percent. If you tried to time the market and missed just 60 of the best days, your annual return came down to nearly zero.

Historically, the stock market has generated positive returns about 75 percent of the time. A market correction occurs when the key indexes fall 10 percent or less from their previous high. A drop of about 20 percent indicates a bear market, which typically lasts about a year, based on market history.

Currently, there are a number of headwinds facing the stock market. For example, higher U.S. tariffs on imported goods from China and other countries could raise prices and impact the sales of manufacturing, distribution and retail companies. Trade wars would also affect the nation’s agricultural companies as exporting U.S. goods becomes more difficult.

Another issue facing investors is whether the Federal Reserve will continue its interest rate hikes, which might slow the growth of some U.S. companies. Wall Street analysts also pay close attention to corporate earnings. When companies report higher profits, their stock prices typically go up — and vice versa.

At this point, it appears that corporate earnings have leveled off at a high plateau, raising the possibility of a decline in 2019. Of course, every company has a different earnings profile, so investors should do their homework and look at both past performance and potential growth before making a decision.

Stay focused on goals

If you hold stocks in your portfolio, you should be mentally prepared for negative returns in some years. So, stay focused on your long-term goals, and don’t try to time the stock market.

If you choose to invest in stocks, learn to expect the down years. Once you can accept that down-years will occur, you'll find it easier stick with your long-term investing plan.

This story was originally published February 1, 2019 at 6:00 AM with the headline "Don’t try to time the stock market."