When fears about the pandemic cratered the stock market back in March of 2020, I watched many of my peers panic, pulling their money from the market to cushion themselves from losses. The temptation to do the same was strong, but luckily, I was bolstered by some reading I'd done back in 2017.
"Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School" by Andrew Hallam has a whole chapter dedicated to overcoming your own instincts in order to more effectively accumulate wealth, and thankfully, the memory of what I'd learned there was all the incentive I needed to grit my teeth and leave my money invested.
Why timing the market is never a good idea
The chapter is called "Conquer the Enemy in the Mirror," and it lays out the counterintuitive way that many investors think about the market. History tells us that most investors jump into the market when it's soaring, and jump back out when it plummets — a process called market-timing — but Hallam explains just how backward those instincts are. He compares it to shopping at a store only when the prices are highest, and shunning or even re-selling its products as soon as they go on sale.
Not only that, but market-timing is largely a myth, as getting in and out at the right moment comes down to luck, not skill.
Ultimately, it's not about timing the market, it's about time in the market. If I'd pulled my investments the moment they started to tank last March, I might have saved myself a lot of short-term loss, sure. But I also would have missed out on long-term gains as my funds recovered themselves, which will ultimately dwarf any day-to-day movement.
A down market is a smart time to invest
As Hallam points out, young investors like me with decades before retirement should thrill when we see a drop-off, shoveling money into our portfolios instead of pulling it out in a panic, knowing that the market has nowhere to go but up. Ignore your plummeting balance and stick like glue to your dollar-cost averaging strategy. Especially in volatile times, these are the moves that reward the disciplined investor: the only way you can be sure of being in the right place at the right time when things begin to improve is to stay where you are.
To illustrate that point, Hallam looked back at the two decades between 1994 and 2013. Over those 20 years, the stock market offered an annual return of 9.2%. But missing just the five best trading days during that period would have knocked your return down to 7%. Missing the best 20 days would have slashed returns down to just over 3%, and if you'd missed the best 40 days, you would've actually lost money. And again, remember that this is over a timespan of 5,037 days, so hitting all the important ones exactly right is an impossibly narrow target.
But maybe you aren't quite sold yet, thinking that you or your financial advisor has trained and studied to be able to predict the kinds of events that will send the market careening in one direction or the other. If that's the case, just know that even in hindsight, it turns out to be incredibly difficult to tie massive market moves of 5% or more to a particular world event, according to Wharton School of Business professor Jeremy Siegel, who Hallam says attempted just that. Ultimately, the market is driven by investor perceptions rather than reality, so it's as vulnerable to sudden swings and human error as you are yourself.
Applying Hallam's lessons to my own life
Which brings us back around to the central message of the chapter: one of the greatest risks posed to your financial future is your own base instincts.
I don't know about you, but since I'm not ultra-confident in my ability to predict the future, and I don't have money to waste on chasing stocks that are already soaring in value, I'm very open to trying to ignore mine. What I do have is time and now, thanks to Hallam, discipline.
Because of his writings in "Millionaire Teacher," I'm knowledgeable enough to realize that stocks collapsing in price is a boon for me and other investors in my age group. And when the pandemic hit, that information helped me run toward those dips and not away from them. (Even when my Roth IRA that I've spent years maxing out went negative, erasing five digits of careful savings and growth.) Against all my better instincts, I clenched my stomach and added money to my retirement account as the numbers started to drop instead of withdrawing it. And thankfully, I've already been able to recover every lost dollar and more.
I'm hopeful that these precipitous drops will become slightly less stressful with repetition, but no matter how uncomfortable I get, I'm determined to take Hallam's advice — refusing to let my instincts or emotions hamstring my investment success.
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