Until You Learn This Investing Lesson, You Don't Know Anything

Even if you've only been an investor for a few days, you certainly know this much already: There's never a shortage of advice regarding stocks. Whether it's buying, selling, or holding, the financial experts always have an opinion for you.

They can be a bit pushy with those opinions, too, suggesting you act immediately on their advice. It would be easy to conclude you're supposed to trade frequently if you want to have any shot at outperforming the market.

Nothing could be further from the truth, however. Leaving your portfolio alone for months at a time, or even years, is the real secret to success. That's because you're never going to guess the market's next major move. Your best bet is standing pat, trusting that quality stocks will ultimately reflect broad economic growth.

You'll never see it coming

That's an argument not everyone agrees with. Some investors (and newer ones in particular) are highly active because it feels productive to exercise complete control over a portfolio.

But this strategy ignores one key reality of the market: You can't predict how it will perform on any given day, yet most of the total net gains in any given year occur on roughly its 10 most bullish days. If you miss out on many, most, or all of those unpredictably bullish days, you're running the risk of missing out on major gains.

Look at last year's daily gains: The S&P 500 (SNPINDEX: ^GSPC) rallied 1,010 points for a 27% gain. If you remove the top 10 days from that, though, the S&P 500's full-year gain is dialed back to a mere 7%.

And 2021 wasn't a fluke. Mutual fund company Putnam found that investors who missed out on the market's 10 best days from the beginning of 2007 to the end of 2021 would have enjoyed gains of less than half the 456% that other investors enjoyed by simply staying in the market and riding out the rough patches.

And to be clear, that's just missing the 10 best days during the entire 15-year stretch, and not the top 10 in each of those 15 years.

There's still a counterargument to be made. Bypassing the market's worst days can save you from losses. If you were able to sidestep last year's 10 worst days as logged by the S&P 500 but were somehow able to be in the market every other day, your 27% gain would be ratcheted up to 49%.

But realistically, the chances of being out of the market on its worst days yet in the market during its best days are awfully slim. Research by mutual fund company Hartford indicates that half of the S&P 500's biggest daily gains were during bear markets, when they were hardly expected. Moreover, over one-third of the market's biggest daily gains during that time were during the first two months of new bull markets, well before most investors are willing to step in.

Do less, get more

It's tough to be sure. People are psychologically wired to avoid pain and seek out gain. Taking action -- any action -- helps us feel like we're doing so.

But that's not what we're doing when we buy and sell too frequently. If anything, given most people's tendency to make ill-advised buying and selling decisions while stressed rather than while they have level heads, such an approach often ends up damaging bottom lines rather than boosting them. And none of us can foresee the market's biggest days.

The point is: Less is more. We're far better served just by leaving our portfolios alone and taking our occasional short-term lumps, knowing that time will eventually dish out the sort of gains we're seeking.

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James Brumley 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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