Learn to Earn by Peter Lynch #4
STAYING INVESTED — THE FINAL LESSON
One of the worst mistakes you can make is to switch into and out of stocks or stock mutual funds, hoping to avoid the upcoming Correction. It’s also a mistake to sit on your cash and wait for the upcoming correction before you invest in stocks. In trying to time the market to sidestep the bears, people often miss out on the chance to run with the bulls.
A review of the S&P 500 going back to 1954 shows how expensive it is to be out of stocks during the short stretches when they make their biggest jumps. If you keep all your money in stocks throughout the next 40 years, your annual return on the investment was 11.5%. Yet if you were out of stocks for the 40 most profitable months during the next 40 years to 1994, your return on investment dropped to 2.7%.
Here’s another statistic to drive this point home of Staying In The Market. Starting in 1970, if you were unlucky and invested $2,000 at the peak day of the market in each successive year, your annual return was 8.5%. If you timed the market perfectly and invested your $2,000 at the low point in the market in each successive year, your annual return was 10.1%. So the difference between great timing and lousy timing is 1.6%.
So, an easy strategy to navigate the Bull (Rising Share Prices) and Bear (Falling Share Prices) markets is to set up a schedule of buying stocks or stock mutual funds so you’re putting in a small amount of money every month, or 3 months, or 6 months. This will remove you from the drama of bulls and bears.
