Key Points
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When investing in the S&P 500, volatility is the price of admission.
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Many investors sell after share prices have gone down and don’t get back in until they’ve already gone back up.
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By trying to time the market and getting out when volatility rises, people often do significant damage to their investment returns.
- 10 stocks we like better than Vanguard S&P 500 ETF ›
The U.S. economy is one of the greatest wealth creation machines in history. Over the past two centuries, it’s experienced multiple evolutions along with regular recessions and even depressions. But over time, it continues to expand and reward the people who invest regularly in it.
One of the easiest and cheapest ways to invest in it is through a low-cost ETF, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO). With just a few hundred bucks, anyone can participate. Just put your money in (or, hopefully, keep investing regularly over time) and let the power of growth and compounding do most of the work for you.
Unfortunately, it’s the “buy and hold” that a lot of people have trouble with.
When investing in the S&P 500 (SNPINDEX: ^GSPC), volatility is the price of admission. Prices rise and fall daily. It’s the ability to ride out those highs and lows that allows investors to capture the long-term returns delivered by these ETFs.
Most people are fine with risk when prices are going up. But when prices go down is when you discover what someone’s real risk tolerance is. When volatility is high, emotions tend to take over. And it’s the one thing that can most damage their long-term returns.
Trying to time the market is the biggest blunder investors can make
Studies have consistently shown that the “average” investor fails to keep up with the S&P 500 over time. That usually involves getting out of the market after stocks have already gone down and waiting to get back in after they’ve recovered. One study from DALBAR showed that while the S&P 500 returned approximately 10.3% annually over 30 years, the “average” investor earned less than 4% over the same time frame.
Investing in the U.S. stock market is one of the few things where people tend to be rewarded more for doing less work. So many people agonize over every market pullback, wondering whether it’s time to get out. In reality, the better path is to do nothing. Invest your money and then don’t even watch what the market does daily.
Market corrections of 10% or more are fairly frequent, often once every year or two. In other words, it’s something you should plan on dealing with regularly. If you’re uneasy with the idea of this kind of loss, perhaps a more conservative asset allocation that includes bonds, cash, or gold would be better suited for you.
The biggest mistake is usually the one that investors inflict on themselves. If you can stay the course, the rewards are often much better.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
