TL;DR: Yes, no matter the current state of the market, it is always a good time to invest. This is because the stock market generally trends up and compound interest is most advantageous the earlier you start investing.
The past year has been hard on everything, the economy included. Stocks have been on a legitimate roller-coaster, going from soaring heights to crashing hard every couple of weeks or so. All of this instability may have caused some investors to question what they should do about their investments.
New investors might be wondering: Is now a good time to invest?
In short, the answer is always yes. It is always a good time to invest, even when the stock market might be facing general uncertainty. In fact, the only time to invest that is better than now is yesterday. Since you don’t have a time machine (or at least, I’m assuming you don’t), It’s almost always better to invest now rather than later.
Why? There are two major reasons:
- Compounding interest is most powerful over long time scales. The longer you let any invested money gain compounding interest, the more money it will ultimately be able to produce. This is because compounding interest is exponential growth instead of linear; at each point, the rate of growth increases depending on how much money is in the account.
- The general trajectory of the stock market over time has been up. Since stock market data first started being systematically collected, the average annual rate of return across the entire market has been about 10% for the last 100 years. So no matter when you invest, you are more likely to make money in the long run than you are to lose money.
So no matter what state the stock market seems to be in, it is always a good time to invest some money.
Historical Returns: 10% Annually
Let’s talk a bit about what this figure actually means, especially because it can be hard to compare money over long time spans like a century. When investors and brokers refer to “the market,” they are almost always referring specifically to the S&P 500, the 500 largest publicly traded companies in the nation. So that means that over the past 100 years, the top 500 companies in the country have managed to produce an average 10% return.
That 10% figure does not account for inflation, however. Investors can expect inflation to knock off about 2%-3% of their total purchasing power per year. Also, an average figure of 10% does not mean that you will most likely always be getting a 10% return. Going off of historical patterns, you will likely get lower returns on the order of 4%-6%, interspersed with periods of very high returns.
Lastly, the stock market is meant for long-term returns, on the order of 5+ years. If you are looking for realizable gains on a shorter time span, then you may want to look into another financial vehicle like a high-yield savings account. It is entirely possible to make a lot of money quickly on the stock market, but it is a rarity and definitely not the norm. Most people who become wealthy through their investments do so over many years of strategic planning and saving.
Can You Beat the Market?
You often hear about strategies and other kinds of methods to ‘beat the market;’ that is, net a higher return than the average market return through strategic buying and selling. The overwhelming odds are that you won’t be able to outplay the market. True, there are some people who do actually do it, but it’s mostly through luck rather than skill.
‘Beating the market’ is complicated due to the overwhelming complexity of the market and the fact that market returns are skewed towards one end of the distribution. That is to say, the majority of stocks underperform while a handful of very high-performing stocks pull up the average.
The difficulty arises because it is very hard to actually find the winners that will generate a return higher than the average. Even the most experienced investors can be caught off guard by seemingly random fluctuations in the market.
So instead of trying to beat the market, your best option is to make sure your funds are diversified. The wider your exposure to the market and different industries, the more likely you are to take advantage of swell in any one of them. Just like the old saying “you shouldn’t put all your eggs in one basket,” you shouldn’t invest all your money into one or just a few individual shares.
This is why index funds and ETFs are so useful. These kinds of funds are indexed to a specific market which is great for passive investors who want to put their money away and let it grow without having to think about it too much.
If you are just getting started investing, we recommend you try a strategy called “dollar-cost averaging” (DCA). With DCA, you space out your investments over a period and invest the same amount at regular intervals, regardless of the state of the market. This strategy lets you split your investment principal over a longer timeframe to minimize risk and lower your average cost per share.
Here is how this would work. Say you have $10,000 to invest. Instead of buying $10,000 worth of shares all at once, buy $1,000 worth of shares every month over the next 10 months. If the share price falls during that span, your average cost per share will be lower than it would if you had bought them all at once.
DCA is a useful technique for taking the emotion out of investing. A lot of people get emotional when they see the market change and might make a stupid decision, like selling too early or buying too late. Sticking to a rigid DCA strategy takes the emotion out of investing so you don’t end up making a rash decision.
DCA also streamlines the investment process as you don’t have to do research all the time. Choose a handful of good index funds, set up automatic deposits every month, and you can more or less let your money grow without you having to do much.
Tips When Investing
Here are some useful tips to keep in mind when you are investing.
- Figure out your risk tolerance. Risk tolerance defines your investment strategy and it’s different for every person. Once you know how much risk you are willing to tolerate, you can make your investment selections.
- Figure out a game plan. You should not invest without some long-term goal in mind. Are you trying to save for retirement? Are you trying to make money to buy a house? Or do you just want more money to your name? Your game plan will define your long-term investment strategy.
- Diversify. A diverse portfolio is a key element of a winning investment strategy. Diversifying your funds insulates you from risk and maximizes your potential gains.
When Investing Isn’t the Best Idea
It’s always a good idea to start investing, but it might not always be the best idea. Here are some situations where you might want to hold off on investing:
- You have no emergency savings. You should try to have at least 6 months of emergency savings before you start investing your money. You can’t exactly rely on your investment money if you lose your job or there is some other unexpected emergency.
- You have high-interest debt. High-interest debt is like mold; the longer you let it sit the worse it gets. You should put your extra money toward any high-interest debt first before investing it.
- You need short-term funds. Investing is for long-term horizons, so if you need short-term funds (<5 years), your money might be better suited elsewhere, such as a high-yield savings account or a CD account.
In short, it is always a good time to invest, no matter the current state of the market. As long as your funds are properly diversified, you are more likely to make money over time than you are to lose money. The key is to be patient and not let market movements agitate you into making a rash decision. As long as you have a thorough and regular investment strategy, you can make money on your investments.