The stock market can make fools out of investors. Just when you are sure that things can only get worse, the market will reverse and head back up. That is why trying to time the market is so difficult and most people who try it end up losing or severely underperforming.
Many times in my life I have thought the market was at its top. Its easy to get worried about the economy, political events, terrorism, and a host of other things. Those can all cloud your view on the future and make it easy to believe that the stock market will head down. "How on earth can things get better?" "Surely there will be a multi-year depression or recession." Thoughts like that can lead you to prematurely sell your stocks which may result in losses or at least severely underperforming the market.
For more than 100 years, as the humorous chart below depicts, just holding and staying the course would have gotten the job done: (Click on it for a better and bigger view)
Holding on to stocks when the market is tanking is one of the hardest things an investor can do. After 30 years I still fail to do it all the time. Its just too easy to get swept up in the negativity and when your dark imagination takes over, selling seems like the smart thing to do.
But when the market stabilizes and I fail to recognize it and fail to buy back in, thats when I feel silly and know I have made a mistake. Some experts recommend only looking at your stocks periodically (every month or every quarter) in an effort to suppress that urge to sell. If you spend less time monitoring your stocks, the thinking is that you won't be as tempted to sell.
The chart above shows that buy and hold has worked for more than 100 years. Yet many will have you believe that you need to be an active trader to make money in stocks. But the simple truth is that the longer a time period you have to invest, the greater your chance of outlasting any protracted downturn....if you can resist selling when everyone else is panicking. Its extremely hard to stick with the "buy and hold" strategy but it is something that you should get better at if you are young and have many years ahead of you.