With the world in the midst of a pandemic, stocks have been on a roller coaster over the last few months. The stock market went from all-time highs to all-time lows in just a matter of weeks.
If you have your money in the stock market, you’ve probably wondered if you should take out your money. And for those who haven’t even started investing, you’re probably wondering if now is a good time to invest.
The stock market is down! The stock market is up! Is now a good time to invest?
The answer? It’s always a good time to invest. In fact, you probably should have invested yesterday.
Why? Because every day you invest your money, you’re more likely to earn money on your investments.
That’s because of two factors:
- The stock market has historically gone up which means that even if your portfolio has a bad year and you lose money, you’re likely to gain it back in a few years.
- The power of compounding. Every time you earn money on your investment, it contributes towards the amount of money that you earn interest on and so on and so on. Think of it this way.
If you invest $100 and you get a 10% return, you have $110. If you leave that money in the stock market, you not only gained $10, but you will also get a 10% return on that $110, giving you $120, and so on.
Of course, the stock market can be complicated. There is always a risk that you will lose some money, but if you keep your money in for the long-term, you’re more likely to get a nice return on your initial investment.
Why you shouldn't time the market
The stock market is unpredictable. No one knows how it will perform tomorrow or the next day, not even the experts.
The best you can do is try to understand how stocks work and have an understanding of why they might go up or down. But if you try to wait until the perfect time to invest, you’ll drive yourself crazy.
You may have heard experts saying ‘buy the dip’ or to ‘buy low and sell high.’ This is just another way of people trying to time the market. The truth is that no one knows if the stock market is going to be at an all-time high or low tomorrow.
Instead of timing the market, you should try to diversify your portfolio in order to get a dollar-cost average when it’s time to retire.
Understanding the concept of dollar cost averaging
There are a number of investing strategies and dollar cost averaging is one of them. The goal is to reduce the overall volatility of the market on your portfolio.
Keep in mind that this strategy assumes that prices will eventually always rise. And while historically that is accurate, the strategy can’t protect you from the risk of an extended declining market.
Historical data doesn’t guarantee future returns.
What is dollar cost averaging?
Dollar cost averaging or DCA, is when the total amount you want to invest is purchased over a certain amount of time to reduce the impact of volatility on your overall portfolio.
The purchase will happen regardless of the stock price and at regular intervals. For example, putting money into your 401(k) every month.
This is also the easiest way of investing, as it doesn’t require you to do a ton of research on various stocks ahead of time.
How does dollar cost averaging work?
Let’s take the example of a 401(k). If you decide to invest $200 each month, then that will automatically go into whatever fund or investments are in your 401(k) every month.
Some months you might buy at a loss. Other months you could buy more stock because the market was down. Either way, the key is that you are investing consistently.
However, if you stop investing when the market is low then start again when it is high, you will potentially miss out on your portfolio increasing in value.
For example, if you buy shares of a company for $10 a share. Say that the shares start going down to $6 a share and you decide to stop investing. A few months later, let’s say the shares went up to $12.
You missed out on buying more shares when they were half the price. That is why it’s important to invest on a regular basis.
Key factors to keep in mind whenever you invest
1. Have clear objectives
It’s important to keep in mind why you are investing in the first place. Is it for retirement? How much do you need to live on during retirement? Are you investing for a short-term goal, like buying a house?
Having a clear goal in mind and revisiting those goals often will help you figure out the best investing strategy for you. It will also keep things in perspective when you’re feeling overwhelmed with the volatility of the market.
2. Understand your risk tolerance
Depending on your age, income, and goals, you may want to have a riskier portfolio. Or maybe you want to err on the side of caution and have a conservative portfolio.
Either way, it’s important to know how much risk you want to take. All investments are risky, and some are riskier than others.
If you have a longer time frame, then you can probably afford to take some more risks. If you’re going to need your money soon though, then it probably makes more sense to invest in something with more stable returns, like fixed-income investments such as bonds.
3. Have broad diversification
Having a diverse portfolio is another way to protect your portfolio against volatility. For example, you can purchase exchange traded funds (ETFs) or mutual funds which have holdings in a variety of different companies across different sectors.
You can also invest in stocks of foreign companies, or certain geographical areas. What’s important is that you have a mixed portfolio and you don’t hold too much of one stock or sector.
4. Think long term
If you read the headlines on a daily basis, it’s easy to get overwhelmed. Stocks are going to go up and down, sometimes multiple times a day. It’s stressful to watch your portfolio on a daily basis. Instead, remember to think long term.
If you invest, it should be for the long haul. Remember that just because stocks tanked today doesn’t mean you won’t have enough money for retirement.
If history tells us anything, it’s that stocks have a boom-bust cycle. What goes down eventually goes back up.
When "now" may not be the best time to invest
While now is always a good time to invest, there may be situations where it is better to wait.
You have no emergency savings
If you are living paycheck to paycheck, you might not want to invest. Instead, focus on building up your emergency fund.
It’s important to have some money saved up for unexpected expenses like replacing a tail light on your car or needing a plumber to fix a leaking toilet. Have at least three to six months of living expenses saved up.
You have high interest debt and no plan to pay it off
Debt is not good, especially if you have high interest debt like a credit card bill. If you have high interest debt, work on paying off that debt before you consider investing in the stock market.
- Caveat: You always want to take any free money your employer offers
The only exception to the above is if your employer offers a 401(k) matching plan. In that case, you should take advantage and invest as much as your employer matches.
Essentially you’re getting free money, and who doesn’t love getting stuff for free, especially money?
Investing is almost always a good idea
So is now a good time to invest? Yes. This is especially true if you’re a woman.
Not only is there a gender pay gap but there is also a gender investing gap. While it’s not fair at all, it’s reality.
If you want to become financially stable, it’s time to invest in your future and take advantage of every investment opportunity you can.
Ready to get started? Check out our completely free course bundle on how the stock market works!