The past few years have been a wild ride for the stock market, and if you’re sick of all the ups and downs, you’re not alone.
Many pundits have predicted everything from a major market crash to a 2008-style recession in recent months, leaving investors confused about where stock prices are actually headed.
Continued market volatility has not helped with this confusion. While S&P 500 still up more than 11% year-to-date, share prices have fluctuated a bit recently — with the index down nearly 7% since the end of July.
So is it really safe to invest in the stock market right now? Or should you wait in case another drop is coming? The answer may surprise you.
Is now the right time to invest?
It’s tempting to try to invest at the right time. In hindsight, it’s easy to look back and think how much you could have made if you had invested at the bottom of the market and then sold your shares when prices peaked.
In reality, however, timing the market effectively is nearly impossible. As the last few years have proven, even the experts don’t know for sure how the market will perform. If you go all in and buy or sell at the wrong time, it can cost you dearly.
A much safer alternative is to simply keep investing regardless of what the market is doing. This strategy is called dollar cost averaging, and it involves investing a certain amount at regular intervals throughout the year, rather than investing everything you have at once.
When you invest consistently, you end up buying both when prices are at their peaks and when they are at their lowest points. Over time, these highs and lows should average each other out. This can not only save you money, but also takes the guesswork out of deciding when to invest.
The key to greater safety of your money
Dollar cost averaging often makes it easier to invest during periods of volatility because you don’t have to worry about what the market is doing every day. But it’s just as important to maintain a long-term perspective.
When you invest regularly throughout the year, there may be times when you invest at what seems like the worst time right before stock prices drop. But the long-term performance of the market is much more important than its short-term ups and downs, and it is still better to invest at the “wrong” time than to postpone the investment altogether.
For example, say you invested in an S&P 500 index fund in February 2009 — just before the index bottomed out amid the Great Recession. Your investment would lose value almost immediately, but by the end of the year you would have earned a return of more than 35%.
On the other hand, say you held off investing until August of that year—when the market was already in recovery mode. While this may have seemed like the safer strategy at the time, you would only earn a return of around 13% by the end of the year.
When you maintain a long-term perspective, there isn’t necessarily a bad time to invest. You may experience short-term losses if the market turns bad, but as long as you hold your investments until stock prices recover, you can earn much more than if you wait for the perfect moment to buy.
One important caveat
The last thing to keep in mind is that no matter when you invest, choosing the right investments is critical. Weaker companies will have a harder time recovering from market declines, and if your portfolio is full of volatile stocks, you could lose more than you gain.
The best stocks are from companies with solid fundamentals, such as strong financials, a competitive advantage and a strong leadership team. These stocks will still often experience short-term volatility, but are much more likely to recover and continue to post long-term growth.
With strong stocks in your portfolio and a long-term perspective, your investments are much more likely to recover from even the worst downturns. And by investing consistently, you can set yourself up for significant gains over time, regardless of what the market is doing right now.