Warren Buffett Says Doing Nothing Beats Doing Something. History Says He's Right.

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Imagine it's Jan. 1, 2008, and you've just put your savings into the SPDR S&P 500 ETF Trust ( SPY -0.38% ) . The financial crisis hasn't fully turned into a disaster, but the signs are building. Subprime mortgage funds are imploding, and Bear Stearns will fail altogether in about two months. The benchmark S&P 500 ( ^GSPC -0.30% ) is about 9% below its high, but investors aren't in panic mode yet. By the end of the year, your investment has lost nearly 40% of its value. The bottom won't come until March 2009, with the S&P 500 down more than 50%. What would you have done in that situation? Would you have sold along the way? Would you have ridden it out to the bottom and back? Warren Buffett would have held on. In fact, he'd probably have been shopping for bargains around that time. As stock prices kept falling, his decision to hold probably would've looked like a mistake. History, however, shows it would have been the right decision. Warren Buffett: Image source: Getty Images. The problem with trying to time the market or making an emotional decision to sell during volatile markets is that you have to be right twice to make it work. You have to get out before the bottom is in, and you have to buy back at a price lower than where you sold. In reality, most investors don't have the stomach to buy when conditions are at their worst. They'll say that they'll "wait until things get better" before getting back in. The problem with that is that stocks usually start rebounding long before conditions "get better." The true buying opportunities get missed. Investors lock in the losses and miss out on the gains during the recovery. This is what damages long-term returns.

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