Things you might not have learned in school but should know about: When to invest in the stock market
The short answer is that the best time to invest in the stock market is as soon as you have money to invest. Trying to predict the "perfect" time to buy and sell stocks, a practice known as market timing, is incredibly difficult and often leads to missing out on significant gains. Instead, a long-term, consistent approach is widely recommended.
The Importance of a Long-Term Perspective
Historically, the stock market has trended upward over time, despite experiencing numerous periods of volatility, recessions, and crashes. For example, the S&P 500, a key benchmark for the U.S. stock market, has delivered an average annual return of around 10 percent over the last century. This long-term growth is why many financial experts say that the best time to invest is always "now," as time in the market is more important than timing the market. The longer your money is invested, the more it has the opportunity to benefit from compounding, where your earnings begin to generate their own earnings.
Understanding Market Cycles: Bull vs. Bear
The stock market goes through cycles, which are broadly categorized as bull markets and bear markets.
- Bull Market: This is a period of sustained and significant growth, typically defined as a 20 percent increase from recent lows. Bull markets are characterized by optimism, rising stock prices, and a strong economy. Investing during a bull market means buying into a rising market, which can be tempting, but it also carries the risk of buying at inflated prices.
- Bear Market: This is a period of prolonged decline, usually a 20 percent drop from recent highs. Bear markets are associated with pessimism, falling stock prices, and a weakening economy. While they can be unsettling, bear markets present a potential opportunity to buy quality stocks at a discount. The challenge is that it's impossible to know how long a bear market will last or how low prices will go.
A Better Strategy: Dollar-Cost Averaging
For most investors, a simple and effective strategy is dollar-cost averaging. This involves investing a fixed amount of money at regular intervals (e.g., every month or paycheck), regardless of whether the market is up or down.
Here's how it works:
- When prices are high, your fixed investment buys fewer shares.
- When prices are low, your fixed investment buys more shares.
This strategy helps you to automatically buy low and take the emotion out of investing. It also reduces the risk of investing a large sum of money right before a market downturn. Dollar-cost averaging is the default strategy for most employer-sponsored retirement plans, such as a 401(k), as contributions are made consistently with each paycheck.
For more specific advice on how much to invest, 401(k) allocations, when to invest more or less, or with any questions about the stock market or investments, please call or email us. We welcome your responses and questions, and do not charge for meetings.
