The past few years have been tough for the stock market, and many investors have seen the value of their portfolios plummet. However, things are looking up. S&P500 (^GSPC 1.23%) It has soared more than 33% since late 2022.
It's unclear whether prices will continue to soar, but many believe we are in the early stages of a new bull market. If so, 2024 could be a great year for the stock market. But some investors fear this is just a temporary rally before another economic downturn hits.
So will 2024 be a year for the record books, or is a new recession looming? Here's something that's not as important as you might think.
What does the future hold for the stock market?
The unfortunate reality of the stock market is that it's always unpredictable to some degree, so even experts can't say how it will perform in the short term. Also, trying to invest at the right time can hurt your earning potential.
Case in point: back in 2022, there were countless warnings about an upcoming recession and market crash. Few expected the market to soar so much over the next year. If I had pulled my money out of the market or stopped investing at that time, I would have missed out on significant gains in 2023.
Timing the market has always been incredibly difficult, and it almost always requires more luck than skill to pull it off. Therefore, a safer (and more effective) strategy is dollar-cost averaging.
Dollar-cost averaging involves making investments at regular intervals throughout the year, regardless of market trends. Sometimes we buy when prices are high, but sometimes we invest at deep discounts. Over time, these highs and lows can average out.
Long-term outlook is key
With dollar-cost averaging, you don't have to guess when to buy, so you don't have to worry as much about short-term market fluctuations.
That said, it's hard not to get nervous about market movements, especially during periods of high volatility. But the good news is that no matter how volatile the market is in the short term, it so far has a perfect track record of recovering from even the worst downturns. Therefore, even if you invest during “bad” times, your investment should recover in the long run.
For example, let's say you invested in an S&P 500 index fund in April 2008, just before the Great Recession began. His next year or so may have been tough as the value of his portfolio plummeted, but if he could weather the storm, he would have made more than 50% return in seven years.
Now, would you have made more money if you had invested right away when the market bottomed in 2009? Of course. But hindsight is 20-50, and there is no way to know at that moment that the price has reached its lowest point. If you had waited until the market started to recover before investing, you would have missed out on the early stages of a new bull market.
So one of the worst mistakes you can make is waiting for the best time to invest. Time is your most precious resource, and if you put off investing until the “right” time to buy, you're missing out on valuable time to grow your money.
There is one important caveat
There's never a bad time to invest in the stock market, but it's important to invest in the right place. Volatile stocks in unhealthy companies have a harder time recovering from downturns, and you can potentially lose more than you gain with this type of investment.
The best stocks are from strong companies with solid underlying business fundamentals. This includes everything from a competitive advantage in the industry to financial health and a talented leadership team to guide the company through difficult times. Stocks that are doing well are still often affected by short-term volatility, but they are far more likely to recover.
It's impossible to say what the market will do throughout the remainder of 2024, but with the right strategy, that doesn't necessarily matter. By investing in strong stocks and holding them for the long term, you can rest easy knowing your portfolio is better protected no matter what happens to the stock market.
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