Do Nothing: Calm Yourself to Win the Stock Market
Not convinced? Here’s the proof with real numbers.
Everyone enters the stock market to win — or we can say, to gain a profit over the cash they invest. It’s the sole motivation, right? No one expects to lose their wealth.
There was a time when I’m too focused on the moving price, every single second. I was stressed. Multitasking between work and the stock charts taxed my brain dry. The effort doesn’t equal the result. Even the profit and loss cancel each other out. Trading isn’t my forte.
Then, what I found is, it’s actually better to care less about the stock market, to maintain the balance of my psychological state. A study showed there’s a solid link between negative daily stock returns and worsening anxiety, panic, and depression. It’s a long term investment product, yet people (myself included) freaked out when they lost money in a few days/months.
The recent bear market caused by COVID-19 also made panic. The virus plummeted all our unrealized profits. Most of us didn’t know what to do. Amidst the uncertainties, some questions surfaced in my mind:
- Do we buy it now?
- Or do we sell now?
- Does it go even lower?
- When will this go up?
Well, it’s no use to answer those questions. Not a single person can 100% predict the future. In fact, Larry Swedroe (director of research of The BAM Alliance) found that 64% of the analyst forecasts ranging from 2010 to 2018 were false.
How can we do better then?
Turns out, doing nothing might be the answer. It’s the mental state to stay calm and collected, whenever the stock prices swing up and down radically. If we really invest for the long run, we won’t need to trade, speculate, or time our entry. Just buy, buy, buy, and do nothing. Time will pay us.
Not convinced? Let’s prove it.
We’ll use the S&P500 index as it represents major companies’ stock prices. Data gathering and processing were done using Python. The code snippet code is available at the end of this article. If you’re not a code person, use this Google Colab file. No install required, it’s all on the web.
Timing Does Matter, but Time Is More Important
Imagine we bought $1,000,000 shares back in March 2020. In 5 months, our decision will increase its value to $1,567,000. The bull market generated us a massive 56.7% return.
Now let’s shift the scenario earlier by 1 month.
We would have purchased $1,000,000 shares during the highest peak before the crisis. In only a month, our investment value became $660,000 — losing approximately 34%. Though 5 months later, it crawled back to $1,035,000 (only 3.5% return).
This proves that entry timing is one hell of a gold digger — at least during a market crash. However, 34% loss looks cute if we go way back to the past. It’s just another dip on the graph. The overall trend still goes up.
In August 2020, the index had achieved its all-time high, surpassing the last peak in February. Whenever we buy stocks in the last 20 years, chances are, we’ll see green returns on our portfolio.
I’ve always thought timing is the way to win the stock market, but it doesn’t seem like the only way. Historical index performance makes me feel at peace with my emotions. I don’t panic anymore when the price is down. With enough time, history will speak for itself.
But what if we buy and sell at a different time frame? Do we gain or lose?
Your Chance of Profit and Loss
Let’s relive history. Imagine if we have the chance to invest in any month from the year 2000 until now. We’ll look at every month’s index price, compare it to the price 5 years later, and calculate the P/L (Profit or Loss).
Since the latest data is in August 2020, the P/L that can be generated are the purchase between January 2000 to August 2015. You can try experimenting with your own “long-term” but it’s wise to not go under 5 years.
Here’s the result. Blue means profit & red means loss.
A quick glance at it shows there are far more blue bars, but let’s calculate more details:
- Over 188 months, the chance of getting a positive return is 131 times.
- Whenever we buy, the probability of profit in 5 years is ~70%.
- Moreover, the range of loss is only 33% at maximum while the range of profit goes as far as 146%.
- Even if we do lose, it’s only -11% on average while we can profit 56% on average.
I never knew the chance and scale of gain is that high. This reinforces me to be calmer whenever I buy stocks, may it be on resistance or support level. I don’t care about now, I care about later.
Blindly investing in the stock market with 5 years long timeframe will yield profit most of the time. But are there better ways to maximize our gain?
It’s Wiser to Buy Periodically
If you find a method to maximize profits in the stocks, tell me! Even the analysts’ forecasts aren’t reliable. But there’s a common technique for long-term investors called dollar-cost averaging. As sourced from Investopedia:
Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase.
In short, it’s our consistency in purchasing stocks on a regular basis. DCA can cope with the volatility of the market since the transaction is made from time to time. Just buy every period without timing our entry.
Let’s simulate the case when we start early and be consistent every month. The blue area represents your average buy price in August 2020, if we start DCA from each particular month.
As you can see, DCA did a great job of removing the volatility. The only jagged area is around the end because the investing frequency is still low, not even a year yet. Starting early will let us gain higher & make our portfolio less prone to sudden price drops. We won’t have to panic over market crashes.
If you invested $100/month in the last 1 year, you’ll have $1,433 today. Compare that 1 year with these scenarios. If you started DCA from:
- 5 years ago, you’ll have $7,975 today. This amount is 4.56 times more with 4 years difference.
- 10 years ago, you’ll have $19,549 today. This amount is 12.64 times more with 9 years difference.
See how the multiplier multiplied?
I always invest routinely, because how else is the best way? Making it a habit will make it more interesting for my future self. I’m stopping the “what if” so there’ll be no regret over the past. I’m waiting for the day where I’m glad I did.
We can win if we trade smart, but we can win too through sheer diligence. The earlier we start, the firmer our ground will be. Though we may need to review our portfolio once in a while if we invest in individual stocks.
It’s Okay to Not Be the Stock Experts
Not all of us are economic or financial experts. I’m not either. We don’t have the same level of financial literacy as them, but the market doesn’t see our background. We all have the chance to win.
The stock market is considered a high-risk high-return, so be ready to go both ways. If you panic buy/sell over every raise/dip, it’s based on your emotion and fear, not rational thoughts. That makes you a trader then, looking for short-term opportunities.
Doing nothing when seeing the price go up and down will eventually result in positive returns. All long-term investors know this.
I decided to do productive works instead of worrying about the stock market. Focusing on our business or career is far more important and rewarding.
We invest in the stock market, believing our money can grow. Then, believe in the market. Investing is a time game.
I’m happier now that I worry less.
Disclaimer: All these calculations are based on historical index prices, not individual stocks. This article doesn’t recommend you to buy stocks by any means. Any investment decisions are yours.
Appendix
For intuitive code with outputs, access the Google Colab file. Feel free to experiment with different time yourself!
