Over the past decade, the S&P 500 index (^GSPC), as of April 15, has achieved a total return of 207%. This would mean a $10,000 investment at the beginning of the period would now be worth approximately $30,700, which is an outcome that would likely satisfy many investors.
However, the volatility associated with the stock market can be daunting. For instance, the S&P 500 is currently trading 13% below its record high, posing psychological challenges for investors. Despite this, there are strategies to maintain a steady course.
To protect against downturns, investors should consider avoiding costly mistakes. Here are three strategies to keep in mind:
Avoid Market Timing: Although it may seem logical to try to avoid market declines and capitalize on upswings, timing the market can be detrimental. A study by JPMorgan Asset Management shows that missing just the 10 best days of the S&P 500 over the past 20 years could drastically reduce total returns by more than half. It is advised to invest early and regularly to benefit from compounding returns, and employing dollar-cost averaging can also provide a systematic approach to investing.
Focus on Long Term Investment: While consistent portfolio growth is desirable, the stock market’s nature can be unpredictable. Investors focused only on short-term gains through frequent trading may end up damaging their portfolios’ performance. Despite the 24/7 news cycle pressing for constant action, it is recommended to maintain a long-term perspective to mitigate risk.
- Diversification Over Concentration: Warren Buffett’s success with a concentrated investment strategy is not easily replicable. While concentrating investments in a few businesses can theoretically yield high returns, it also introduces significant risk and volatility. Adopting a diversified investment strategy, such as maintaining a portfolio with at least 25 different stocks, can mitigate these risks, ensuring exposure to various industries and reducing the overall stress of market fluctuations.
Investors naturally aim to make astute decisions with their portfolios. However, avoiding these three common pitfalls might be the most beneficial approach, allowing the positive returns to follow naturally.
Disclosure: JPMorgan Chase is an advertising partner of Motley Fool Money. Neil Patel, the author, and his clients do not hold positions in any of the mentioned stocks. The Motley Fool has holdings in and recommends JPMorgan Chase and adheres to a disclosure policy.
