These financial times can feel a bit unnerving with those spicy headlines about the stock market. You may have even looked at your own account, and maybe it’s not compounding as fast as you thought it would, or you see a little red here or there with some negative numbers. All this may lead you to wonder if you started investing at the wrong time.
OR you’re contemplating becoming an investor because you’ve seen what compound interest can do for your money and made room in the budget, but you still don’t know how to time the market and when the best time is to start investing.
So, you ask, “Amanda, when is the best time to invest in the stock market anyway? Is it after a recession? Before a large upswing? How can you time the market perfectly?”
My answer may surprise some because of its simplicity: the best time to invest in the stock market is NOW, regardless of whether the market is up, down, or even sideways. Investing in the stock market is always a good idea, no matter the day or the time! Why? because our money does best when it has time, and time is the one thing we can never get back.
We are long-term investors here, so a dip in the market—even if it lasted a couple of years—doesn’t affect us! We still have the same number of shares, and the value of those shares will eventually recover.
Fun fact: The US stock market has never NOT recovered. You haven’t actually lost any money if you haven’t sold anything.
So, what should you be doing? Let’s dive in.
When to start investing in the market
First, let’s take a look at the big picture for a second. If you zoom out and look at the stock market over the past few decades, you'll notice something interesting: despite all the ups and downs, it has consistently trended upwards. Sure, there have been some significant dips and crashes along the way (looking at you, 2008!), but overall, the market has steadily increased in value.
So what does that mean for you, the investor? If you're in it for the long haul, you don’t have to worry about those dips because the stock market always recovers (say it with me five times fast 😎).
Trying to time the market is a fool's errand. Instead, invest consistently over time and let the power of compound interest do its thing.
To sum up: there really is no such thing as the *best time* to invest in the stock market, but there is such a thing as long-term investing, which can protect you against the dips of the market. Zoom out, look at the big picture, and don't get spooked by temporary dips.
Historical stock market trends
Let's take a closer look at some of the historical trends in the stock market to show you what I've been saying.
If we look at the S&P 500 index, which tracks the performance of the top 500ish companies in the United States (you know, like Apple, Google, Amazon, and Tesla, to name a few), we can see that it has been on a steady upward trajectory for literal DECADES. The S&P 500 has averaged an annual return of about 11% over the past 90 years. That's a pretty impressive track record!
Of course, there have been some major dips along the way, like the Great Depression in the 1930s, the dot-com crash in the early 2000s, and the recession of 2008, and who can forget *cough, cough* Covid in 2020? But even still, the market has always bounced back and continued its upward trend.
The longer you hold onto your investments, the more time they have to grow and compound, and the less likely you are to experience a loss.
If you're patient and willing to invest for the long haul and ride out the inevitable bumps, you'll likely come out ahead. Of course, there are no guarantees in the stock market, but the historical data suggests that long-term investing is a solid strategy for building wealth over time.
How to invest in the stock market for long-term gains
While it's true that the stock market has historically trended upward over the long term, there will always be periods of volatility and uncertainty. So it's important to have a plan in place for protecting your investments during market downturns.
Here are a few strategies to help earn long-term gains when investing:
1. Diversifying your portfolio
Diversifying your portfolio is one of the best ways to protect your investments against stock market dips.
Don't put all your eggs in one basket. Instead, invest in a variety of assets. This can help spread out your risk and reduce the impact of any single market downturn.
Did you know you can even buy a pre-packaged diversified portfolio?! Yep, they’re called Target Date Index Funds. You don’t have to worry about making decisions about what to buy, and you can rest assured that your assets are well dispersed.
2. Allocating your portfolio to different assets
Another critical aspect of protecting your investments is asset allocation. This involves deciding how much of your portfolio to allocate to different types of assets.
For example, you might choose to put more money into assets such as bonds as you approach retirement age because these assets tend to be less volatile than stocks. However, if you are many, many years from retirement, you might choose to allocate more of your portfolio to stocks and other similar assets over things like bonds. This is because while they tend to be higher risk, they also yield a higher rate of return.
3. Avoid panic-selling
Selling your investments and cutting your losses can be tempting, but this is often a mistake. The stock market is impossible to time, and trying to predict when to sell and when to buy back puts you at a higher risk of losing money. Instead, stick to your long-term investment plan and resist the urge to make emotional decisions based on short-term market movements.
Remember, investing is a marathon, not a sprint, and a well-designed investment plan can help you stay on track and achieve your financial goals.
Using dollar cost averaging to achieve long-term investment success
There was a time when the only thing I really knew about buying stocks was the phrase "buy low, sell high.” And it turns out that’s actually pretty dumb advice.
It would be nice to have a crystal ball that can predict when the market will be at its highest or lowest point, but we don’t. That's where dollar-cost averaging comes in. (And PS: if anyone tells you they DO know when the market will go up and down, then they are lying. They’d be a billionaire if they could perfectly time the market.)
Dollar-cost averaging is a fancy term for investing a fixed amount of money at regular intervals, regardless of market conditions. Think of it as the "set it and forget it" approach to investing. It takes the guesswork out of timing the market and allows you to buy more shares when prices are low and fewer shares when prices are high, and that’s why I love this approach. How one can put it into practice: “I’m just going to automatically invest $X every other Friday when I’m paid.”
Remember the tortoise and the hare? Dollar-cost averaging is like the tortoise: It may not be the flashiest or most exciting approach to investing, but it's steady, reliable, and can help you reach your long-term financial goals!
Wrapping up
So don’t panic, ignore the headlines, and go on with your life.
When in doubt, zoom out! 😎
