After its steep plummet at the beginning of the year, the stock market rally last month seemed like cold comfort, and it continues to wobble up and down without much rhyme or reason. While investors may feel the urge to take action against the volatility, an article in The New York Times offers the advice to do nothing.
Only those with true psychic abilities would have done better in the stock market this year than those who did nothing, the article contends, selling exactly on January 3rd and buying again on June 16th. But for those investors not blessed with the power of prediction, it’s better to take a long-term approach: devise a stable investing plan, invest in low-cost index funds that offer a stable array of stocks and bonds, and then do nothing. While this year’s big declines got the most headlines, there was also a turnaround on June 17th that was overlooked. Stocks rose steadily for the next 2 months, with the S&P 500 gaining 17.4% through mid-August, and returned 17.7% when factoring in dividends. But that still leaves it 31% off its high—a likely reason why not much was made about the rally, and the fact that the S&P 500 is still in a bear market. Until the benchmark reaches its January 3rd peak again and the bull market returns, no one will be popping the champagne, especially as the Fed continues to raise rates and inflation remains high (8.5% at the most recent reading for the CPI).
Still, it’s entirely possible to invest well throughout this uncertain period, the article maintains. It pays to remain calm; those who panic-sold during the decline earlier this year missed out on the significant gains over the summer. As long as investors were setting aside enough money to cover their expenses, riding the wave of volatility was not that risky. I bonds, money market funds, high-yield savings accounts, certificates of deposits, and bonds (both short-term government and high-quality commercial) are also safe options for storing cash reserves. After socking your cash away safely, construct an investing plan with a long-term view—at least a decade—that relies mostly on low-cost index funds that track the whole market. Those who are closer to retirement could invest in the bond market as well—but younger investors should stick to stocks for now, the article advises.
Of course, those with a keen sense of prediction and skilled expertise in the market could try to buy and sell the right stocks at the exactly right time. But the risk that your selections—and timing—are wrong is greater. Taking the buy-and-hold approach doesn’t require you to be right about much, just that the stock market will eventually go back up, which it will, more likely than not.