One Investing Rule to Follow No Matter How Wealthy You Are

The S&P 500 has made significant gains lately, skyrocketing 92% over the past five years. But if you had asked nearly anyone five years ago how the stock market would perform during the throes of a global pandemic, they most likely would have told you it would be a terrible time to invest.

Sure, there was some volatility over the past five years, but the S&P 500's gains have been impressive nonetheless. Interestingly, if you had listened to Chicken Little during this time and assumed the sky was falling, you would have tapped the sell button in your investing app and completely dismantled any potential returns you could have earned.

The lesson? No matter how wealthy you are, timing the market is rarely (basically never) the right answer.

Why you shouldn't try to time the market

You've probably heard many people discussing what you should do with your money if a certain candidate wins office or where to invest your money if a specific geopolitical event occurs. But generally, it's best for your portfolio to block out all the noise and not try to time the market.

Why? Because you don't have a crystal ball that shows when the bad days will turn into good days. Consider this: J.P. Morgan data shows that seven of the best 10 days in the S&P 500 occurred within two weeks of the 10 worst days.

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To drive this point home, the investment bank gives some hard numbers for how much you'll lose out on by trying to time the market and getting it wrong. Here's how timing the market would have worked out over the 20 years (ending in 2023):

This is a sobering table for anyone trying to time the market, and it shows that if you pulled your money out of the S&P 500 and missed just 10 of the best-performing days, you would have cut your total ending amount by more than half!

And if you were extra cautious and took your money out for longer, causing you to miss 20 of the best-performing days for the S&P 500 over that period, you'd take home 72% less than you would have had you kept your money invested.

You've been warned.

Consistently invest your money instead

If the wrong answer is timing the market, then what's the right answer for how to invest? Keep your money invested and consistently add to it.

The S&P 500 has a historical average annual rate of return of 10.2%. Of course, you won't earn that much each year and this percentage doesn't account for inflation. But it's still a good measurement for showing investment potential.

For compounding interest to do its magic, your money needs to be sitting in your portfolio. Here's what your hypothetical returns could look like over four decades of consistently investing:

Again, there's no guarantee you'll earn 10.2%, but you can see just how much money your initial $10,000 (plus $200 of contributions monthly) can turn into during that time. Even if we take a more conservative approach with just $150 invested monthly and average annual returns of just 6.5% to account for inflation, we still get impressive results:

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That's still a very impressive final amount, and it's even better when you consider that the S&P 500 is doing all the work for you -- no timing the market required.

One caveat to all this is that as you near retirement, it's a good idea to adjust your portfolio to own fewer stocks than when you were younger. Doing so helps reduce your exposure to more volatile investments, and instead focus on safer investments like bonds. But for the most part, putting your money into an S&P 500 index fund and adding to it each month is one of the best ways to create wealth over the long term.

And the best part is that you don't have to do any hand-wringing over timing the market or worrying about what's happening in the economy to benefit.