The stock market’s average annual return is a cool 10%, which is better than what you can find in bonds or a bank account. Despite investing in the stock market, many people fail to earn that 10%, and this is because most of them don’t stay invested long enough to reap its benefits.
Remaining in the stock market is the key to making money in stocks. The best predictor of your total performance is your length of the ‘time in the market’. Unfortunately, most investors miss out on the annual return since they often move in and out of the stock market at the worst possible times.
Stay Invested to Make Money Investing in Stocks
More time implies more opportunity for your investments to go up to a higher value. Over time, the top companies usually increase their profits, and investors reward these greater earnings with higher stock prices. It is this higher price that translates into a return for the investors who still own the stock.
With more time in the market, you can also collect dividends, provided the company pays them. You can kiss those dividends goodbye if you’re trading in and out of the market on a monthly, weekly, or daily basis since you most likely won’t own the stock at the critical points on the calendar to grab the payouts.
If that doesn’t convince you, consider this. According to Putnam Investments, over the last 15 years, the market yielded 9.9% annually to those who continued to remain fully invested. However:
- Your annual return dropped to 5% if you missed only the 10 best days of that period
- Your annual return dropped to 2% if you missed the 20 best days
- Your annual return dropped to -0.4% (you lost money) if you missed the 30 best days
Individual Stocks or Index Funds?
While you can earn much more potentially with higher returns in individual stocks than in an index fund, you’ll need to spend some time researching companies to earn it all. The right place to invest is in an index fund if this 10% annual return sounds great to you.
Index funds can comprise of many stocks, ranging from dozens to hundreds of them that mirror an index, like the S&P 500, and so to succeed, you’ll need some knowledge about individual companies. Again, the discipline to stay invested remains the main driver of success.