The S&P 500 Is Reaching New Highs. History Says This Is the Riskiest Move Investors Could Make Right Now.

Earlier in August, the S&P 500 index (SNPINDEX: ^GSPC) reached new all-time highs. Despite the big gains that stockholders have seen in recent years, many investors are feeling nervous. There is sharp disagreement about whether major tech companies are spending too much on artificial intelligence (AI) infrastructure that might not pay off. Other investors worry about rising interest rates and lingering risks from the conflict in Iran.

Whatever you're worried about as a stock market investor, it's important to remember one key lesson from history: Selling stocks because you're afraid of a stock market downturn is usually a bad idea. Most of the time, for most people, timing the market doesn't work. If you're a long-term investor with a five- to 10-year or longer time horizon, it's better to just stay invested (and keep investing) through all kinds of ups and downs in the stock market.

Let's take a closer look at why timing the market is a losing proposition, and learn what you should do with your money instead.

Image source: Getty Images.

What is timing the market?

The idea behind "timing the market" is understandable. We've all had those feelings of worry and fear: "What if the stock market crashes the day after I put money into my brokerage account?" But making these short-term moves based on emotion can cause you to lose a lot of money in the long run.

An individual investor might think to themselves, "The stock market seems overvalued and too risky right now. I believe the S&P 500 is going down by 20% next year. So I'm going to stop putting more money into stocks for a while, until the stock market drops. Then I'll buy more stocks." Another form of market timing is when someone decides to sell some stocks and move that money into safe cash, and "wait until things settle down."

Why timing the market doesn't work

Here's the problem: no one knows whether the S&P 500 is going up or down on any given day, month, year, or decade. Even if you guess correctly about now being the "right time to sell" and you cash out your stocks right before the S&P 500 drops 10%, how do you know when is the "right time to buy"?

Or if you're staying on the sidelines and not investing in the stock market, waiting for share prices to go down so you can jump in, how do you know when "things settle down"? And keep in mind that many investors get scared during a stock market downturn. Would you really be confident enough to go through with jumping back into the market when the headlines are screaming about a stock market crash?

Trying to time the market might make you feel safe. But that feeling is an illusion. By trying to avoid the risk of loss, you end up taking a big risk of missing out on even bigger future gains. The stock market can move faster than you can. Sometimes it goes up faster than pessimists expect. Some of the best days on Wall Street deliver the biggest gains for investors. Fidelity research shows that missing out on the best five days of stock market performance since 1988 would have reduced an investor's long-term gains by about 38%.

What to do instead of timing the market: buy and hold investing

Trying to time the market can be incredibly costly, and it's far safer to simply stay invested even if a downturn is coming. That might sound strange and risky, but it's true. Since 1926, the S&P 500 index has delivered average annual returns of about 10%. That includes major stock market crashes, such as the one that led to the Great Depression.

In the past 10 years, the popular Vanguard S&P 500 ETF (NYSEMKT: VOO) has delivered annualized returns of over 15%. That includes major corrections such as the 2020 COVID-19 pandemic and the 2022 bear market. This S&P 500 ETF is up 19.5% in the past year.

Just buying a simple low-cost index fund like VOO and holding onto it for years is often one of the best ways for individual investors to build long-term wealth. Just buy lots of stocks and hold onto them. Keep owning that portfolio through thick and thin, no matter what happens in the day-to-day ups and downs on Wall Street or the background noise of the financial news media.

No one knows if the S&P 500 will go up or down today. But in the long run, just buying one of the best S&P 500 ETFs with the 500 largest publicly traded stocks in America tends to deliver strong returns that can help you build real financial security.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.