Investors: This Is the Most Expensive Risk You Might Be Taking Without Even Realizing It

Long-term investors know the risks involved with investing, which is why they are long-term investors. They protect themselves from risky markets filled with short-term volatility by having a diversified portfolio of well-managed, well-capitalized companies with long-term growth potential that can help them ride out the ups and downs.

But if you try to time the market, jumping in when stocks are on a dip and cashing out after they rise a certain amount, you're inviting a certain degree of risk -- the risk of not maximizing your investment. That's because you don't really know if you are buying low and selling high, and you are risking missing the best days.

An analysis by Fidelity Investments found that missing the top five days on the stock market from 1987 through 2025 would reduce a hypothetical portfolio by 38%. Missing the 10 best days would reduce it by 55%, and missing the 30 best days would drop its value by 84%.

On the other end of the risk spectrum is the risk of being too cautious. When markets are volatile and uncertain, as they are now, many investors may be tempted to wait on the sidelines for the right conditions before they start adding shares.

That might work for Warren Buffett, who was hoarding cash in his multibillion-dollar Berkshire Hathaway portfolio over the course of the bull market. However, it doesn't always work for investors looking to grow their retirement or long-term portfolio.

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Time in the market, not timing the market

The key to building wealth has always been time in the market. The longer you invest, the more time you have for your investments to grow and compound.

The difference between staying invested for 10 years and 30 years is startling. If you invest $10,000 at age 25 in a portfolio that averages a 10% average annual total return -- which is about the S&P 500 average over the past 100 years -- and contribute $100 per month, it would be worth around $46,000 after 10 years.

After 20 years, that initial investment would surge to $139,000. But after 30 years, it would be worth roughly $381,000. It didn't take any brilliant investments or strategic maneuvers to gain that much; it just took time in the market and average returns.

History is on your side

Now, you still need to effectively manage your portfolio to even gain average or, hopefully, above-average returns. But that doesn't necessarily mean cashing out huge chunks of your portfolio and waiting for the market to settle before you jump back in.

It means reassessing your portfolio, rebalancing it if it gets out of whack somewhere, and making sure you are not holding too much of a stock, or stocks, that are wildly overvalued or speculative. If you are, weed those out, but look to reinvest in stocks that are more reasonably valued or have strong catalysts for growth, or seek out exchange-traded funds (ETFs), which are diversified by nature.

History has shown that bull markets not only happen more frequently, but they also last longer and average higher returns than bear markets do losses.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.