To put it lightly, 2022 hasn’t been kind to many stocks, including the three major indexes. The Dow Jones, which consists of 30 of the most notable household names, is down over 6% YTD. The S&P 500, which many use to gauge how well the stock market as a whole is doing, is down over 10% YTD. And the tech-heavy Nasdaq Composite has taken the worst beating them of all, down over 17% YTD. (All three as of August 16.)
Even sitting at 17% below January highs, that somehow still doesn’t give the full picture of how just how interesting of a year it’s been for the Nasdaq Composite. At one point the index had shed almost one-third of its value, but since hitting its low point in mid-June it has rallied, increasing over 22% from June 16 to August 16.
However, even with the Nasdaq Composite’s most recent bull run, investors should be careful giving it too much attention.
Death, taxes, stock market swings
The two things you can count on in the stock market are volatility and market swings. They’ve happened frequently in the past, and nothing leads me to believe that they’ll stop happening in the future. If you’re focused on the long term, you want to give little thought to these short-term stock market swings because they can be distracting.
In the grand scheme, it doesn’t matter too much if a stock spends a year bouncing from +20% to -20% if you’re a long-term investor because those numbers only exist on paper. This is especially true if the reason for the price swings doesn’t have anything to do with a company’s business. The Nasdaq Composite hasn’t had a rough 2022 because the tech sector suddenly became less valuable to society; it’s had a rough 2022 because the stock market has had a rough 2022. The index also hasn’t had a recent bull run because it suddenly got more innovative; it’s had a run because that’s the nature of the stock market.
What matters is the returns you receive in the long run when it’s time to sell years down the road. You never want to get too low on the lows or too high on the highs because you could find yourself getting too discouraged during down periods or a bit too confident during up periods, neither of which is good. Getting discouraged can prevent someone from investing (which isn’t the answer), and getting too confident can cause someone to downplay the risk.
Try to avoid emotional decisions
The goal should always be to remove the emotions from investing, because emotionally driven money decisions rarely work better than logical-based ones. That’s why dollar-cost averaging can be so effective. With dollar-cost averaging, investors commit to making regular investments at set intervals with no regard for stock prices during that time.
Let’s imagine you commit to investing $250 into a Nasdaq Composite index fund every first and third Friday of every month. Since you have a schedule set in place, it doesn’t matter how well (or terribly) the index fund is performing; your job is to make your investment no matter. Nasdaq Composite in a full-blown bear market? Make your investment. Nasdaq Composite skyrocketing in a bull market? Make your investment.
Dollar-cost averaging is essentially how a 401(k) plan operates. Every pay period, the percentage you chose is contributed and invested, with no regard to the performance of your selections. Investors do this with little to no thought, because they trust that the value of their 401(k) will be noticeably higher than the amount they personally contributed by retirement. When investing outside of your 401(k), you should have the same thought process. If not, you probably shouldn’t be making the investment.
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