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Long-term investing has consistently been shown to be a reliable strategy for building wealth over time. While it may be tempting to try and time the market by jumping in and out of investments in an attempt to maximize profits, this approach is often futile and can even be detrimental to your financial success. The S&P 500 index, which tracks the performance of 500 of the largest publicly traded companies in the United States, has historically returned an average of around 10% per year. Rather than trying to predict short-term market fluctuations, it is generally more effective to adopt a long-term perspective and focus on building a diverse portfolio of quality investments that align with your financial goals.
The market action in 2022 gave me an unpleasant reminder of this universal truth. Let me tell you all about this awkward lesson.
There’s always another shoe about to drop. Or maybe it’s an unexpected upswing across the board. You just never know what’s next. It is genuinely impossible to predict the unpredictable, and my K-Mart crystal ball was defective out of the box.
In hindsight, many of the shocking swings in 2022 make perfect sense. You can trace them back to original causes years ago, and many of them (but not all) converge on the coronavirus crisis. Government responses to the COVID-19 pandemic were imperfect around the world, sowing the seeds for factory closures, rising energy prices, shifting consumer spending patterns, and labor shortages.
But those long-term effects of lockdowns, stimulus payments, travel restrictions, and vaccine distribution strategies were not so obvious in real time. Likewise, I’m sure future historians will scratch their heads over how we’re handling the inflation surge, worker shortage, and currency exchange challenges right now. Looking back from 2028 or 2033, I’m sure the correct course of action will be obvious, in large, blinking neon lights.
We’re just too close to the action to see it yet.
This shouldn’t have been news to me given I often repeat the universal truth that market timing doesn’t work. The only way to know for sure where the market as a whole or any particular stock will move in the next day, week, or month is to have absolutely accurate insider information before anyone else. It’s illegal to take advantage of that secret info and make guaranteed money in the stock market.
Perfect investing should be a completely emotionless exercise in analysis and money management. However, we’re all human. So in the middle of summer, when the inflation crisis appeared to have reached its final peak, I decided to take resolute action. If inflation-based pressures are going away soon, growth stocks that had taken drastic haircuts in the first half of 2022 were surely destined for immediate rebounds.
I like to keep some money on the sidelines for the next no-brainer investment opportunity. This summer, I saw such an opportunity. Most of that cash suddenly found its way into high-octane growth stocks that had seen dramatically lower share prices over the previous six or seven months.
For example:
The results of that binge have been mixed so far. As it turned out, the inflation crisis wasn’t really over yet, and the stock market as a whole was under continued pressure in the fall. The Trade Desk has traded in tandem with the S&P 500, falling 3% in roughly six months. Fiverr has clung closer to the more volatile Nasdaq Composite index, with price drops in the low double-digit area.
And then there’s Roku. I thought the stock was way undervalued last spring, only to take another 20% price cut after an underwhelming earnings report in July. Another round of gloomy guidance brought more price drops in November. By the end of the year, Roku’s shares had lost 82% of their value.
I saw many signs pointing to a quick market recovery, which surely would send these stocks much higher in a hurry. The second half of 2022 didn’t play out as I’d expected. Many of the stock purchases I made in June and July have been wildly unprofitable so far, and I would have been much better off saving at least some of that dry powder for the even lower prices we see today.
Now, I didn’t do everything wrong last summer. I didn’t pour my cash into the latest, greatest flash-in-the-pan or any blink-and-you-missed-it penny stocks. We are still talking about great companies with promising futures, and they’ll be ready to thrive when this economic crisis is over — even if it takes several years.
That’s the real trick to successful investing. To quote master investor Warren Buffett, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” It’s all about the magic of compound returns on your investment over many years.
So I thought I was grabbing shares of wonderful companies at wonderful prices, but I’ll gladly settle for a merely fair price anytime. 2022 reminded me that market timing is just gambling under a different name. Long-term investing is still a proven money-making strategy. Come back in five or 10 years, and I’m sure the buys I made last summer will have made serious money by then.
Anders Bylund has positions in Fiverr International, Roku, and Trade Desk. The Motley Fool has positions in and recommends Fiverr International, Roku, and Trade Desk. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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