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Is Now a Good Time to Buy Stocks?
Despite economic uncertainties and U.S. unemployment, the recovering stock market offers potential for investment. Experts often suggest that with a strategic, long-term plan, any time can be suitable for investing in stocks. We’ll take you through some of the important factors to consider before buying stocks below.
Should You Invest Now?
Yes, it’s safe to invest, but with an understanding of market dynamics. Short-term market shifts can be unsettling but shouldn’t sway your long-term strategy. While predicting immediate market trends is a challenge even for experts, history underscores its resilience. Over the past twenty years, despite several economic setbacks, the S&P 500 has still risen by over 207% since 2000. Waiting indefinitely for the “perfect moment” might mean missing out on potential growth.
Why Investing is Almost Always a Good Idea
But should you be investing in the first place?
If you’ve got capital, you don’t want it to just sit doing nothing in your bank account. Investing in the stock market allows you to grow your existing capital and benefit from rising inflation costs instead of falling victim to it.
Even if it crashes, the stock market has always been following an upwards trajectory. You’ll almost always get your money back in a few years. As long as you stick to your investment plan and focus on the future, investing is a good idea.
Expert Advice on Investing Right Now
During the 2008 downturn, Warren Buffett highlighted the essence of opportunistic investing in a New York Times piece. He asserted, “I can’t predict the stock market’s short-term movements,” yet suggested that recovery often begins subtly. His advice: “If you wait for the robins, spring will be over,” implying that prime opportunities can be missed by those waiting for overt signs. Buffett encapsulated the sentiment, stating, “Bad news is an investor’s best friend,” indicating that downturns often provide the best chances to invest in the future at a discount.
Investing the Sustainable Way
Consistency in investing is crucial, but where you put your money matters just as much. Prioritize companies with strong fundamentals. As Buffett emphasized in his 2021 Berkshire Hathaway letter, “[W]e own stocks based upon… long-term business performance… Charlie and I are not stock-pickers; we are business-pickers.” Amid market volatility, focusing on robust businesses with a long-term view can lead to lasting wealth.
Why You Shouldn’t Time The Stock Market
“Timing the market” involves buying stocks at a low and selling quickly once they rise. While some profit from this, it comes with risks. Investors often miss out on long-term dividends by waiting for the lowest price, or they buy high and sell low, missing potential gains. As unpredictable events like pandemics show, predicting the market is challenging. Christopher C. Davis of Davis Advisors notes, “Trying to time the market is a loser’s game. $10,000 invested over 20 years became $48,000. Miss the best 30 days, and it drops to $9,900.”
Stock Market 101
Below, we’ll provide a brief crash course in the Stock Market for the beginners who are considering getting into investing.
What is the Stock Market?
The stock market represents shares of company ownership available for purchase. Companies list on stock markets based on their headquarters’ location. Stocks can yield returns through dividends, compound interest, or by selling them at a profit. In the U.S., there are 13 stock markets with NYSE and Nasdaq being the largest.
What Does it Mean When the Stock Market is Up or Down?
So what does it actually mean when the news says the stock market is up or down?
The stock market is up when general prices for the stock have increased from a certain point in time. Similarly, the stock market is down when the prices have decreased.
These stock prices tend to be linked to interest rates, generally determined by central banks and the Federal Reserve, or the profits and losses of big companies.
What Is Dollar-Cost Averaging?
In investing, higher risk often leads to greater rewards. If you prefer a more cautious approach, consider Dollar-Cost Averaging (DCA). DCA involves consistently investing the same amount in the stock market over time. It aims to reduce portfolio volatility by purchasing more shares when prices are low and fewer when they are high, though it doesn’t safeguard against prolonged market declines.
4 Things to Keep in Mind When Investing
The most important thing when it comes to investing in the stock market is having a clear, well-thought-out investment plan (this is true for visa holders in the U.S., too). Here are 4 important things to keep in mind if you are planning to invest.
1. Have Clear Objectives
It’s not a good idea to just invest for the sake of investing. Set yourself a goal, like saving up for retirement or to buy a house, that you can aim for. It’ll also help you keep your focus when the markets are volatile and could be a valuable indicator for when you’re ready to cash out your investments.
It is, however, important to continuously revisit your goals. Change is a big part of life so your needs and wants may change in the long-run.
Renowned economist and investor, Benjamin Graham, explained nicely: “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
2. Understand Your Risk Tolerance
Another important step before you invest is to assess your financial situation and determine if you can afford a potential stock market crash. Important factors that will influence your risk profile include your age, family status, income, and how soon you would need the money.
You can afford to be riskier with your portfolio when you’re young with no dependents. But if you’re nearing retirement age or have a family to support you might want to be more conservative with your investments.
These factors should also influence how much risk you want to take when buying stock from less stable yet rising companies. If these companies go down, how much would it impact your financial security?
Your risk tolerance is all about how much you can afford to lose without having to sell your stock out of need. Many people advise that you should ensure your debts are paid off and you have a comfortable emergency fund before you think of buying stock.
Diversity is the spice of life—so too with your stock market portfolio. It’s never a good idea to put all your eggs in one basket. Invest in different industries and foreign companies, or opt for exchange-traded funds (ETFs) or mutual funds that have holdings in a variety of companies.
Also, don’t invest your entire portfolio in the stock market. Allocate some of your funds to fixed assets like property to help weather economic downturns with high unemployment and other crises.
Deciding on a predetermined target percentage for how much of your portfolio will go to stock and sticking to it also prevents you from being tempted to time the stock market.
4. Think Long-Term
Watching your stocks fluctuate every day will drive you mad.
Instead, you should be looking at what your investment can yield in five to ten years’ time. The stock market isn’t designed to yield a quick buck with a few key buys and sells here and there. You’re far more likely to see a positive return over many years. This is especially true when you consider that throughout the stock market’s existence, investors have seen an average 9% annual return.
It also provides a buffer for weathering the bad years when the stock market crashes. In such circumstances, it’s especially important to stick to your stocks and wait for them to bounce back.
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Despite the hard economic times that the pandemic has forced us into, stable and solid companies will still be standing and bouncing back in the future good times. If you buy in now, this will increase your investment through compound interest and dividends.
Crises also make businesses more resilient in the future as they have to adapt to the new normal, either through policy changes or technological advancements.
Based on the information we’ve given you above, you can assess for yourself—is now a good time to buy stocks?