29 May 2024
In mid-May, the Dow Jones Industrial Average touched 40,000 for the first time in the index's 139-year history. And even though the Dow has since declined a bit, crossing a big round number always seems to lift investors' spirits.
More importantly, the blue-chip index's new record was a validation for investors who had kept their nerve and stayed in the market through the past few years. Think about how many market gurus were warning of recession and a bear market. As they always have, investors who are patient and who ignore scary headlines as well as euphoric ones tend to see gains in their portfolios over the long run.
And that's exactly why investors shouldn't be discouraged if the Dow and the stock market in general follow an up-and-down path for at least the next few months. It's very possible that the Dow specifically could move up and down in a range, fluctuating between, let's say, 38,000 and 40,000 without breaking out significantly above or below these levels.
The reason is that there's a lot of uncertainty now, specifically around inflation, interest rates and even the upcoming presidential election. But there's a good reason to stay invested in the market: A new bull market could start at any time. If you're on the sidelines when it begins, you could miss out on significant gains.
The 1982 bull market, for example, began after a stagnant period in the 1970s. And the 2009 bull market followed a sluggish phase after the 2008 financial crisis. Many investors missed significant portions of those rallies because they thought it wiser to stay out of the market until it was clear that sustainable gains were occurring. But correctly guessing the right times to jump in and out of the market is something that even professional investors fail at.
For instance, in 2023, 60% of all active large-cap U.S. equity funds underperformed the S&P 500 (https://www.spglobal.com/spdji/en/spiva/article/spiva-us/). The reason: Rather than just holding on to stocks, they tried to outsmart the market by buying and selling at opportune times.
Yes it can be hard to stay the course when your portfolio is stagnant or falling in the short term. But buying into the market and staying invested really does work to your advantage over time. If you had bought an S&P 500 ETF at the market high that preceded the Covid crash of 2020, you'd still be up 57% today. The gains that investors make in stocks is critical in preserving or even growing the spending power of their money over time.
Yes, there's risk in owning stocks, but it's a tradeoff for the potential of long-term reward. In the stock market, time is your friend.