Is Now The Right Time To Invest?
"Is now a good time to invest?" Over the last few months, I have been asked this question more than any other point in my entire career. So I wanted to take a moment to address it and help you understand a few key points to help you answer this question for yourself.
Timing The Market
Timing the market is a fool's errand. In an ideal world, we would all buy at the lowest point in the market and sell at the highest. Unfortunately, we don’t have a crystal ball to predict the future. Sure, there are cases where someone or some company has taken an [educated] guess and gotten lucky. But for the most part, that’s all it is - a guess and it’s most likely not a repeatable process. It is especially not repeatable for the vast majority of retail investors who are utilizing company retirement plans (401k, 403b, etc) or self-directed accounts (Brokerage, IRA, Roth IRA, etc.).
In addition to being almost impossible, trying to time the market can be more detrimental to a portfolio than advantageous. The graph below illustrates how the effect of missing the best days in the market can dimension overall returns. Trying to time the market can result in missing some of the best (or worst) returns.
Source: Putnam Investments
If you are nervous about putting your full investment into the market at once, you can utilize a dollar-cost averaging strategy. Or simply, putting a little bit into the market at a time. Most people already do this through employer-sponsored retirement plans like a 401k. You are investing a set amount of money in each pay period rather than making one large contribution 1 time per year.
Determine Your Time Horizon
One of the most important aspects of determining if now is a good time to invest is determining your time horizon - or how long you plan on keeping the money invested. If you are investing for a long-term goal, then there really isn’t a bad time to invest. It is hard to look back on the history of the stock market and find a 10-year period where the market’s average return isn’t positive. Sure there were ups and downs along the way, but more than likely your investment would have been successful. Conversely, if you are investing for the short-term, volatility becomes a much more important factor. A big drop in the market takes time to recover from, and if you don’t have that time, you could find yourself realizing those losses.
Many people struggle to determine what their investment time horizon is. Many people come into my office and think of their investment time horizon as the point in time in which they are going to retire. However, I coach my clients to view it differently. Most people have a good 20-30 years ahead of them after retirement, so just because you stop working, doesn’t mean you get out of the stock market. Just because you are near retirement doesn’t mean your time horizon is short. It may be time for a more conservative strategy but your time horizon can still be considered long-term.
Source: Macrotrends LLC www.macrotrends.net Historical data is provided as-is and is solely for informational purposes, not to be used for investment advice. Past performance does not guarantee future results.
Determine Your Risk Tolerance
Ask yourself this - If I am investing X amount of dollars and the investment goes down 10% how will I feel and react? What about 20%? or 30%? In an ideal world, emotions would not play a part in our investment decisions. But the reality is, they do. If a drop in the market is going to cause you to lose sleep at night - then maybe taking a lot of risk isn’t the right thing for you. If your response to a drop in the market is to stay the course or invest more - then you may be able to handle a little more risk tolerance.
Create a Media Filter
Creating a media filter is a way to help eliminate all of the noise that surrounds us. It also helps manage emotions when it comes to your investments. On any given day you can turn on the TV, pick up a newspaper, or go online and find reasons why you shouldn’t invest. There will always be a new ‘end of the world’. A media filter doesn’t mean shutting yourself off from the information, it is about retraining the way your brain processes that information. Remember, the media is a business, it is designed to get you to watch or tune it. Their goal is to become a necessary part of your life. If you were to constantly listen to the media you would be completely paralyzed by all of the negativity.
Create a Plan
Creating a plan will provide you with an overall better sense of financial confidence and direction on how to invest the dollars. It will help determine the appropriate asset allocation for your time horizon, risk tolerance, and will test your probability of success for the financial goals you have set. The great thing about a plan is nowhere in it does it determine when is the best time to invest. The plan assumes you are fully invested all of the time and then stress tests different market conditions.
There is no way to determine when the best time to invest is. Hindsight is 2020, we can all look back and say that would have been the best time. But in the moment nobody really knows for sure. So the question to ask yourself is - do I believe the stock market will be higher in 10 years, 20 years, 30 years. If you think it will be higher, then you have answered your own question - start today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss. Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. Past performance does not guarantee future results.