By Craig Erwin, Ph.D.
The stock market was on fire in July (during a bear market). It was the best month for the market since November 2020. In July the S&P 500 was up 9%, which is close to the average annual gain of about 10% for the S&P 500. A whole year’s gains in one month. It may seem like quite a feat for the stock market to rise so much when the news is so bad, but markets often rise when the news is terrible and everyone is pessimistic. Why? Because many sell their stocks and stay on the sidelines, so there are lots of prospective buyers. Similarly, when everyone is optimistic, there are few people who haven’t already bought stocks, so there are fewer prospective buyers.
Even though July’s stock gains are sizeable, it’s way too early to declare that the economy has healed and the stock market will climb to new highs. The market is very good at making us (and experts) look like fools. The economy may improve sooner than we think, but it may also take years. The stock market may plunge to frightening depths, or it may rise straight to new highs. No one knows. Experts and journalists go to great lengths to make sense of stock market gyrations, but can they really predict the future? They may sound convincing, but if they really know what the economy and stock market are going to do, why aren’t they rich enough to quit their day jobs?
What can we learn from July’s big stock market gains? Stay in the market. If you sell your stocks and wait until better or safer times to invest, you’ll miss out on big gains. When we expect the worst, the stock market often has its best performance. And when the market has been setting records with big gains, it may surprise us all and crash.
The best approach to investing in the stock market is to buy and hold. Hold no matter what, staying in the market day after day, year after year. It’s trading (buying and selling, buying and selling) that gets you in trouble. So don’t trade; buying and holding will enrich you, especially if you keep buying and buying.
If the bear market in stocks is over, we will all breathe a huge sigh of relief. But if the stock market reverses course and tumbles again and is mired in the muck for months or years, that’s actually going to benefit us much more than a rapid recovery. Why? Because we will get to buy stocks at bargain prices while the stock market is way down. If the market keeps climbing, we won’t get to buy on the cheap. I would much prefer a nasty recession with lots of stock market carnage to a raging bull market. Then we can make plenty of money buying cheap stocks. Eventually the market will recover and we will look like geniuses, having bought low.
So don’t invest based on the news or market performance. Buy regularly like clockwork no matter what is happening in the world, the economy, or the stock market. If you invest only when you think it makes sense, you’ll make a lot of stupid decisions, often pay too much, and often fail to buy when you should. Instead just keep buying, month after month, year after year, no matter what. Someday you’ll have accumulated a small fortune with almost no effort, no decisions, and no need to be smart or clever. It’s not rocket science. Did you benefit from the July stock market rally?
Do you trade stocks or buy and hold? How optimistic are you about the economy and the stock market?
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