Staying invested might be the single most powerful yet hardest-to-follow piece of advice when it comes to building long-term wealth. It sounds simple to advise an investor to buy quality investments and hold them for years. But in reality, market drops, economic headlines, and fear of loss tempt many investors to hit the sell button too soon.
History shows us time and time again that staying invested in the stock market through ups and downs often leads to far better outcomes than trying to jump in and out. In fact, the importance of staying invested can’t be overstated. It’s one of the most reliable ways to let your money grow and compound over time.
This article discusses the risks of pulling out of the market too early, and how you can train yourself to think long-term even when the market feels like a rollercoaster.
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Staying Invested for Compound Growth
Investment guru and one of the wealthiest men in the world, Warren Buffett, has famously been quoted saying “Our favorite holding period is forever.”
The main benefit of holding investments long-term is the stock market’s most powerful wealth-building force: compounding. Compounding is essentially when the earnings from capital gains or interest on an investment start generating their own earnings over time. But compounding only works if you give it enough time.
For example, if you invested $10,000 in the S&P 500 in 1990 and left it there, your investment would have grown to well over $200,000 by 2020. That’s a 20-fold increase, despite living through the dot-com crash of 2000-2002, the financial crisis of 2008-2009, and the COVID-19 pandemic selloff of 2020. The reason is because you stayed invested and let compounding do its work.
If you had tried to avoid downturns by moving in and out, you might have missed key recovery days. Missing even a handful of the market’s best days can dramatically reduce your returns.
Timing the Market Can Result in Big Losses
Market timing is the strategy of jumping in and out of investments based on predictions about future market movements. It may seem logical on the surface to just buy low and sell high. The problem is that nobody, not even professional fund managers with teams of analysts and sophisticated computer models, can consistently predict short-term market movements.
Consider the story of Peter Lynch, one of the most successful mutual fund managers in history. While he was managing the Magellan Fund from 1977 to 1990, Lynch delivered an average annual return of 29.2%. Yet, according to Fidelity Investments, the average Magellan Fund investor lost money. This is because investors kept jumping in and out of the fund, usually buying high during good times and selling low during bad times.
One clear-cut reason for the importance of staying invested is that market rebounds often happen quickly and unexpectedly.
Between 2003 and 2022, if you missed just the 10 best days in the S&P 500, your overall return would have been cut by more than half. And the kicker is that many of those best days occurred within two weeks of the worst days.
For example, during the COVID-19 crash in March 2020, the market plunged 30% in just weeks. (From February 19, 2020 to March 23 the S&P declined about 34%.)
Many investors bailed and sold their shares. But those who stayed invested saw the market rebound faster than almost anyone predicted, recovering in just five months and then hitting record highs. Those who tried to time it often missed out on a large chunk of that rebound.
Learn to Withstand Volatility
The stock market is inherently volatile, and this volatility can trigger powerful emotional responses that lead to poor decision-making. Volatility is the price we pay for the higher long-term returns that stocks provide compared to safer investments like bonds or savings accounts. Without volatility, there would be no risk premium, and without risk premium, there would be no reason to expect higher returns.
Consider the investor who stayed invested through the 2008 financial crisis. Yes, they experienced significant paper losses in the short term. But they also captured the entire recovery that followed. In contrast, investors who sold during the crisis and waited before getting back in often missed months or years of recovery gains.
Dollar-Cost Averaging Helps You Stay Invested
The best way to stay invested in the stock market without stressing over market timing is to use dollar-cost averaging: investing a fixed amount at regular intervals regardless of market conditions.
When prices are down, your fixed amount buys more shares. When prices are up, you buy fewer shares. Over time, this can smooth out your purchase price and help reduce the emotional highs and lows of investing.
For example, if you invest $500 every month into an index fund, you might buy 25 shares when the price is $20, but 33 shares when the price drops to $15. This strategy naturally helps you buy more during downturns, exactly when many people are too afraid to invest.
The Importance of Staying Invested
Building wealth is a marathon, not a sprint. Just like training for a marathon, progress is gradual and built over years of consistent effort. If staying invested feels challenging, here are a few strategies to help:
- Set Clear Goals: Knowing why you’re investing (retirement, college fund, wealth building) can help you focus on the big picture.
- Diversify: Spread your investments across stocks, bonds, and other assets to reduce volatility.
- Don’t React to the News: Market headlines are often designed to provoke fear or excitement. Don’t let them dictate your decisions.
- Automate Your Contributions: Consider dollar-cost averaging to keep adding to your investments without stressing over volatility.
- Work With a Financial Advisor: Having a professional guide can help you avoid costly emotional mistakes.
Understanding the importance of staying invested, maintaining discipline during both good times and bad, and letting compound growth work in your favor over time is the best way to build wealth and achieve your financial goals.
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Nadia Tahir is a freelance writer and content creator. She mostly writes in the areas of lifestyle and personal finance. She also enjoys writing on her blog about motherhood at This Mom is On Fire.
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