Timing the market is risky, but there's a better way to maximize your earnings.
The past few years have been brutal for the stock market, and many investors have watched their portfolios plummet in value. But things have been looking up, as the S&P 500 (^GSPC -1.20%) has surged by more than 33% since late 2022.
While it's unclear whether prices will continue soaring, many people are hopeful that we're in the early stages of a new bull market. If that's the case, 2024 could be a great year for the stock market. But some investors are also worried that this is only a temporary rally before another downturn hits.
So will 2024 be one for the records? Or is another slump looming? Here's what it doesn't matter as much as it may seem.
What does the future hold for the stock market?
The unfortunate reality about the stock market is that it will always be unpredictable to a degree, so even the experts can't say how it will perform in the near term. And if you're trying to invest at just the right time, you may end up hurting your earnings potential.
Case in point: Back in 2022, there were countless warnings about an upcoming recession and market crash. Few people expected that the market would surge as much as it did throughout the following year. If you had pulled your money out of the market or stopped investing back then, you'd have missed out on significant gains in 2023.
Timing the market will always be incredibly difficult to pull off, and in most cases, doing it successfully usually requires more luck than skill. A safer (and more effective) strategy, then, is dollar-cost-averaging.
Dollar-cost averaging involves investing at set intervals throughout the year, regardless of what the market is doing. Sometimes you'll end up buying when prices are high, but other times you'll invest at a steep discount. Over time, those highs and lows can average out.
A long-term outlook is key
Dollar-cost averaging can take the guesswork out of when to buy, so you don't have to worry as much about short-term market fluctuations.
That said, it's tough to avoid feeling nervous about the market's movements, especially during periods of volatility. The good news though is that no matter how shaky the market is in the short-term, it has a perfect track record so far of recovering from even the worst downturns. So even if you invest at a "bad" time, your investments should still rebound over the long run.
For example, say you'd invested in an in April 2008, just before the onset of the Great Recession. While the next year or so would have been rough as your portfolio plummeted in value, if you simply rode out the storm, you'd still have earned returns of more than 50% over seven years.
Now, could you have earned more by investing right when the market bottomed out in 2009? Of course. But hindsight is 20/20, and there's no way to have known in the moment that prices had reached their lowest point. If you'd waited until the market was well into its recovery to invest, you'd have missed out on the early stages of the new bull market.
One of the worst mistakes you can make, then, is waiting for the perfect time to invest. Time is your most valuable resource, and if you're putting off investing until the "right" time to buy, you're missing out on precious time to let your money grow.
One important caveat
There's no bad time to invest in the stock market, but it's crucial to invest in the right places. Shaky stocks from unhealthy companies will have a hard time recovering from downturns, and you could lose more than you gain with these types of investments.
The best stocks are from strong companies with solid underlying business fundamentals. This includes everything from a competitive advantage in the industry to healthy financials to a competent leadership team to guide the company through tough times. Strong stocks will still often be hit by short-term volatility, but they're far more likely to recover.
It's impossible to say how the market will perform throughout the rest of 2024, but with the right strategy, it doesn't necessarily matter. By investing in strong stocks and holding them for the long term, you can rest easier knowing your portfolio is better protected -- regardless of what happens with the stock market.
Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
