Investing has been a hot topic recently, and that has many people wondering: Is it a good time to buy stocks?
When trying to figure out if it is a good time to invest in stocks — or do any type of investing — take a step back to figure out your goals and look at the situation. Here’s what you need to know about whether it is a good time to invest, and how to take your next step.
Is it a good time to invest?
If you follow best practices, the best time to start investing is often right away. When you invest, you’re putting your money to work for you. The sooner you start investing, the better off you’re likely to be in the long run.
Even if markets are high, chances are now can be a good time to invest, just because markets are likely to move even higher in the future. Putting money in now can help you grow your wealth over time.
Is it a good time to buy stocks?
But what about buying stocks? Is it a good time to invest in stocks when the Dow Jones remains near historic levels?
Many people talk about “buying the dip.” As a result, you might worry that it’s not a good time to buy stocks. After all, you want to “buy low and sell high.” Getting caught up in this approach, though, is similar to timing the market. Market timing is problematic because no one knows what’s next for the market.
Historically, though, the stock market as a whole goes up over time. So, when you’re looking at investing across decades, especially for a retirement portfolio, the answer to “Is it a good time to invest in stocks?” is almost always yes, as long as you’re planning to hold onto those assets for more than a decade.
Use dollar-cost averaging to avoid trying to time the market
One way to avoid the trap of attempted market timing is to use a strategy called dollar-cost averaging. This approach potentially provides good long-term results if you have a small amount of money to invest. Here’s how it works:
- Decide how much you can set aside regularly, either weekly, monthly or from each paycheck.
- Use that same amount of money to buy as many shares as you can afford every period.
- Consider setting up an automatic investment plan to take care of it for you so you don’t have to think about it.
Basically, if you can invest $50 per week, you’d use that money to buy as many shares, or partial shares, as possible. So, if you’re buying something that costs $25 this week, your $50 will get you two shares. If the price goes up to $75, your money will get you ¾ of a share. In either case, you’re accumulating shares over time.
While it can seem frustrating that your money buys fewer shares when the market is high, remember that if you keep dollar-cost averaging, even during a market crash, you end up with more shares. In the end, though, the important thing to remember is that the market, as a whole, trends higher over time. Shares you buy now are likely to be worth more in the future, which means you’re still probably going to come out ahead.
Consider index funds as part of your strategy
One reason people ask if it is a good time to buy stocks is that choosing individual stocks can feel like a daunting task. What happens if you pick wrong? One way to reduce some of your risk is to use index funds.
Index funds allow you to purchase a wide swath of the market at once. These funds are basically bundles that follow an index. So, if you buy one share of an index fund that follows the S&P 500, you’re getting a slice of everything listed on the index. The process is similar for index ETFs. With an index ETF, you gain exposure to the index in question.
In either case, using investments that allow you to access the performance of a group of stocks, rather than trying to pick the “right” stock can help you take advantage of instant diversity in your portfolio. You might not ever beat the market, but for many people, keeping pace with the market with the help of index funds is enough to help them reach their long-term goals.
Historically, the S&P 500 has seen annualized returns of close to 10%. And, even though there are years that the index has logged losses, when looked at in any 20-year period, it has never seen losses.
While there’s always a first time for everything, and there could come a time when the stock market and its associated indexes don’t recover, it’s highly unlikely that you will have a net loss if you dollar-cost average into an index fund of your choice — as long as you consistently invest over a period of decades.
So, is it a good time to invest in stocks?
Even though the stock market is currently fairly high, chances are that in 20 years it will be even higher. As a result, the answer to the question, “Is it a good time to invest?” is probably yes, especially for goals that are at least 10 years off, like saving for college and retirement.
Some investors like to dollar-cost average, consistently investing on a regular basis, while leaving some money ready to take advantage of opportunities. The important thing, though, is to start investing even if you have a small amount of money. Consider consistently investing in an index product that makes sense for you as a start. As your portfolio grows and your finances improve, you can look at other assets for a chance to invest and further grow your wealth.