This Is the No. 1 Thing Most Beginner Investors Get Wrong About the Stock Market -- and It Could Cost You Thousands

It's easy to understand why the stock market can be daunting for beginner investors, especially in today's market.

Just looking back since the pandemic's height, there was a year in 2022 when the market fell 20%. Now, over multiple years, the market has gained at least 20%. In between all this, there have been periods when the market has suddenly fallen into a bear market, only to recover quickly.

Now, you have many investors on edge about the artificial intelligence trade, which is deeply tied to the broader market and economy, with some strategists and investors even predicting a "lost decade" for stocks.

It can be difficult to parse all the information coming at you every day. Here's the No. 1 thing most beginner investors get wrong about the stock market -- and it could cost you thousands.

Image source: Getty Images.

Dealing with the volatility

Since the pandemic, the market has certainly felt incredibly volatile and fast-moving.

Investors can now trade mostly commission-free from the comfort of their homes, so it's easier to buy stocks and exchange-traded funds, and easier to sell. That allows people to act on their emotions more easily than in past decades.

There have also been many events in recent years -- including high inflation, the Russia-Ukraine war, and the Iran war -- that have driven volatility. This is where I see beginner investors make their biggest mistake: selling during periods of volatility.

This can happen with individual stocks or the broader market, both of which can experience ups and downs. Perhaps a stock climbs 5% or 10% soon after an investor buys it, and then that individual sells to make a quick profit.

It can also happen when a stock takes a sudden hit, and an investor gets frustrated and sells.

Morningstar recently analyzed stock market volatility from January through April 10. Using the standard deviation of daily returns, the study found the S&P 500 (SNPINDEX: ^GSPC) volatility came in at about 15% annualized.

Surprisingly, 15% volatility is the average for the U.S. stock market over 100 years. The market was much more volatile during the Great Recession in 2008-2009, during the pandemic in 2020, and in the popping of the dot-com bubble between 2000 and 2002.

Now, I'm not saying the market doesn't feel volatile or a bit frothy, but the study shows that it's hard to judge how something compares to the past when you are living through it.

Why selling during volatility could cost you thousands

Reactionary selling during periods of volatility can ultimately cost you thousands of dollars because it's often short-lived, and retail investors should be thinking long term.

When volatility hits and many stocks rise or fall, it often has little to do with a company's fundamental business model or investment thesis. History has shown that long-term S&P 500 investors will usually come out the other side just fine.

Institutional flows still make up the bulk of trading volume, and many are now driven by algorithmic trading or chasing after near-term returns, causing the big moves.

Patient and calm investors are often able to ride it out. Just look at what's happened with the Iran war. High oil prices and inflation expectations initially led many investors to sell stocks.

But overall, the economy has remained resilient, and S&P 500 earnings have soared this year, leading to a roughly 12% gain for the market thus far.

Patience really is a virtue on Wall Street

I'm not saying beginner investors should never sell individual stocks, but context is important. Maybe a stock just sold off 20% or 30% after an earnings report due to a fundamental change in the company's business model. Perhaps its technology is being disrupted, and competition is heavily eroding its margins.

That's a change that could justify trimming or selling a position if you don't think the company can protect its moat. But investors often should take a beat before making a decision and try to assess the longer-term outlook.

If a stock is selling off alongside the entire market due to a macro or geopolitical situation, the thesis is most likely still intact. When it comes to owning the broader market, history shows that the longer you hold the S&P 500, the less likely you are to lose money.

In fact, the S&P 500 has averaged roughly 10% gains annually since its inception in 1957, so selling during volatility or only after a few years is likely to cost you thousands, even if you are in the green.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.