Fear is one of the biggest drivers of investing. It often comes in two forms. The first is the fear of losing money, which can often keep investors from pulling the trigger to invest. This can be because the stock market is trading near all-time highs, like it is now, so some investors worry that they are buying near a top.
However, this is often an overblown worry. The S&P 500 hitting all-time highs is not an unusual event. In fact, a J.P. Morgan study found that since 1950, the S&P 500 has hit a new high on about 7% of all trading days. Meanwhile, it never traded lower on about a third of those occasions. This means that if you waited for a dip, most of the time you were left waiting, missing out on solid gains.
Fear of losing money also often occurs when stocks correct or enter a bear market. While the common mantra is to buy the dip, that is often easier said than done when stocks are getting crushed day in and day out. This also causes some investors to sell with the intent to buy later. However, the market’s largest gains typically follow its largest down days, and studies have found that investors who miss these big reversals typically greatly underperform the market.
In addition to the fear of losing money, investors will also get caught up in the fear of missing out (FOMO). When they see the latest hot stock climbing every day and hear other people talking about all the money they’ve made, it’s not uncommon for some investors to start to chase these stocks. That’s not always a great decision, as over the long term, valuations do matter, and momentum doesn’t last forever. Buying hot stocks that have already climbed a lot often leaves late investors with losses, which is why they are sometimes derogatorily called bag holders.
Image source: Getty Images.
Dollar-cost averaging into ETFs
One of the best ways, in my view, to avoid the trap of emotions affecting your investment decisions is to stick to dollar-cost averaging into index-based exchange-traded funds (ETFs). With dollar-cost averaging, you invest a set amount regularly, regardless of how the market is performing. Over the long term, this will average out your cost basis and set you up to build long-term wealth.
ETFs are the best type of investment to implement this strategy, because they give you an instant portfolio of stocks. Index ETFs, like the Vanguard S&P 500 ETF (VOO 1.21%) and Invesco QQQ Trust (QQQ 1.51%), which tracks the Nasdaq-100, are particularly great options with long track records of strong returns. Most individual stocks tend to underperform, but index ETFs do well because they let their winners run.
Today’s Change
(-1.21%) $-8.29
Current Price
$679.44
Key Data Points
Day’s Range
$678.44 – $683.52
52wk Range
$529.11 – $689.10
Volume
6.4M
Stick to this strategy over the long term, and you’ll eventually build a million-dollar portfolio with a lot less worry.
JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Invesco QQQ Trust and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
