Do nothing on the stock market to make money.
Even though the bear market is still going on, the S&P 500 index went up by more than 17% between mid-June and mid-August. Our columnist says that you shouldn't even try to guess what will happen next.
At the beginning of the year, the stock market dropped so quickly that it seemed like it would never come back.
But it did, in a rally that lasted for a few weeks and ended in mid-August. This would have been a bigger deal if stocks hadn't dropped so much in the first place.
Now, the market has been shaky for the last week or two, with no clear trend in sight.
What should investors do about these crazy shifts in the direction of the market?
Nothing, in a word.
During the winter, when stocks were falling like rocks, my main piece of advice for long-term investors was to ignore market changes. I'm not going to change my mind.
This year, the second-best advice anyone could have given you for investing in the stock market as a whole was to do nothing.
The best advice would have been impossible to give without a crystal ball: You should have sold exactly on January 3, when the S&P 500 stock index was at its highest point, and bought on June 16, when it was at its lowest. (Then you might have wanted to sell again on August 16, before the market got rough. We still don't know what to think about that.)
If you did all of those things, you should be proud of yourself. Please get in touch and tell me how you were able to time the market so well and how you plan to do it again.
Most of us aren't going to be able to buy and sell at the right time often enough to beat the market.
Instead, this year shows why the vast majority of people would be better off taking a longer-term view. Once you've set up a good plan for investing with low-cost index funds to buy stocks and bonds regularly, there's nothing else you can do.
Then, there was a sharp drop.
Let's go over what's happened so far this year.
For months, the stock market was terrible. This newspaper and many others said that, from January to June, it was the worst first half of a year since 1970.
High inflation, war, rising interest rates, and the possibility of a recession all played a role in the poor performance. When interest rates went up, bond prices also went down because bond prices move in the opposite direction of interest rates.
But the fact that Wall Street and the news focused on the first half of the year made it hard to see a big change in the stock market.
Yes, it was clear that the market was going down for more than five months after its peak on January 3. But after June 16, the market took a turn for the better, even though it wasn't clear at first.
A rally that is often forgotten
Think about some numbers.
From January 3 to June 16, the S&P 500 fell by 23.6%, which is less than the 20% drop that is considered a bear market.
Everyone's attention was drawn to the big drops.
The move that started on June 17 didn't get nearly as much attention. Stocks began to go up, and they did so for two months. From when it was at its lowest point until August 16, the S&P 500 went up 17.4%. With dividends, it went up 17.7%. That's a huge return of two months.
To say that no one noticed would be an exaggeration. But it's safe to say that the rise of the market wasn't written about nearly as much as its fall. Many investors might not have even known that stock prices were going up steadily.
This makes perfect sense for one reason: It's not fun to do math. When the value of the market drops by almost a quarter, it needs to go up by much more than that—in this case, by 31 percent—to get back to where it was. Even though stocks went up by 17.4%, they are still well below their peak. Even though you lost money, it wasn't as much.
The S&P 500 is still in a bear market, which is another reason why it isn't getting much attention.
Most of the time, a bear market lasts until the last peak of the last bull market is reached again. You won't read about a new bull market in the news until the S&P 500 hits its peak on January 3, which Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, says was 4,796.56. At the end of business on Thursday, the index was at 4,199.12.
So, if you don't pay much attention to the stock market, it's understandable that you didn't notice the 17.4% rally.
In a way, you didn't really miss out on much. The uncertainty in the stock market and, more important, in the greater economy has not ended. In no way.
Problems with making forecasts
The Federal Reserve says it will continue to raise short-term interest rates to stop inflation from getting out of hand. For now, I think that's the right way to go, even though higher interest rates will hurt businesses and workers, who may lose their jobs if the Fed doesn't back down and the economy shrinks.
It's possible that inflation has already reached its highest point. For the first time since March, a gallon of gas in the area where I live in New York costs less than $4. Drivers all over the country are happy about this.
But at an annual rate of 8.5%, as measured by the Consumer Price Index, inflation is way too high for the Fed to accept. So, the only reasonable reason for a sudden Fed pause would be something very bad, like an unplanned disaster that put the financial system in danger. Nobody would want that.
The best we can hope for is a "soft landing," which is a slow drop in inflation that can be achieved with just a small increase in interest rates, without a big recession or a much worse bear market. Maybe that's possible in this strange economy, which has been messed up by the war and the pandemic. Or it might not be.
I'm not making any guesses.
I mean that you can get by and make good investments even if you don't know where the markets or the economy will be next week or next month.
To the basics
When the market goes down, like it did at the beginning of this year, it pays not to panic. If you sold when the market was going down, you would have missed the big gains in June, July, and August. It would have been much easier to stay calm when I lost money on the stock market.
Please keep in mind one very important caveat: you had to have saved enough money to pay your bills. If you haven't done that, investing in the stock market is a big gamble.
Keep your emergency money in a safe place. Now that interest rates are going up, a number of options are becoming more appealing: U.S. government I bonds, money market funds, high-yield savings accounts, certificates of deposit, short-term government and high-quality commercial bonds.
Then, make an investment plan with a time horizon of at least 10 years and focus mostly on low-cost index funds that track the whole market.
I also invest in bonds in the hopes of finding more stability. Actuarial tables say I'm closer to retirement than to the beginning of my career, and I may need some of the money in the next ten or twenty years.
But if you're just getting started, it's best to focus on stocks and stay away from bonds.
Yes, if you pick the right stocks at the right time and sell them at the right time, you can do even better than my buy-and-hold, total market strategy. But you would need to know a lot or be lucky, or even better, both. When you use the way I suggest, you don't have to be right about much. You are just betting that the economy will grow over time and that some of that growth will be reflected in the stock market.
If you do what I say, you can ignore the short-term changes in the market. Keep putting money into your index funds, especially when the market goes down. This will help you take advantage of lower prices and improve the overall returns you will get over many years.
If you set things up right, you won't have to do anything else with your investments except maybe rebalance them every once in a while to make sure you have the right mix of stocks and bonds.
I'll have more to say about that in the coming weeks.
Quick, short-term moves might be fun, but I wouldn't do them on the stock market. For the money you will really need, it makes more sense to save slowly and steadily.