Disregard sunk costs
Q: What’s a sunk cost? — D.D., Waverly, Nebraska A: It refers to a price paid that can’t be recovered. Since it’s gone and not coming back, it shouldn’t factor into decision-making. Still, many people act on a “sunk cost fallacy” — they figure that since so much has been spent already, more should be spent to make the initial expense worth it.
For example, imagine that you spent $1,200 repairing your car, and you’re deciding whether to sell it or spend more on further repairs. Don’t think about the $1,200; instead, think about whether spending more or selling makes sense. The $1,200 is a sunk cost — don’t let it lead you to throw good money after bad.
Don’t try to time the market
So you’ve heard that the market usually goes up at a certain time of year or usually falls at another, and you’re planning to buy or sell stocks accordingly. Or maybe you just think the market has risen or fallen so much lately that it’s bound to reverse course shortly, so you plan to act on that reasoning. Think twice about doing so, because these are examples of “market timing,” a practice that can lead to poor investing results.
No one can know what the stock market is going to do in the short term — even fancy Wall Street professionals making predictions on TV are wrong plenty of times. (You just rarely hear about those times.) Over the long run (many years or decades), the market has always gone up, which is one reason it’s generally best to be a long-term investor.
Multiple studies have demonstrated the dangers of market timing. Index Fund Advisors, for example, found that in the 20 years from the beginning of 2002 to the end of 2021, someone who remained invested in the S&P 500 index would have averaged annual gains of 9.5%. But an investor who missed the 10 days with the biggest gains in that period would have an average annual gain of 5.3% — while one who missed the 40 best days would end up having lost money.
Index fund pioneer John Bogle once quipped: “Sure, it’d be great to get out of stocks at the high and jump back in at the low, and if you know how to do that, then do that. But I’ve been in this business 55 years, and I don’t have any idea how to do it.”
As the folks at Charles Schwab have noted: “Our research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing. And because timing the market perfectly is nearly impossible, the best strategy for most of us is not to try to market-time at all. Instead, make a plan and invest as soon as possible.”