Is Now a Good Time to Buy Stocks?
Posted by Frank Gogol in Investing | Updated on August 11, 2023
In these uncertain times, you might be wary of buying into the stock market due to a crashing economy and high unemployment in the U.S. Fortunately, the stock market has almost fully recovered from the crash of 2020, and you might want to ride that wave while it’s still going up. So is now a good time to buy stocks?
Whether you’re a first-timer or seasoned stock buyer, many experts advise it’s never a bad time to invest in the stock market—as long as you have a well-researched investment plan that focuses on long-term yields.
We’ll take you through some of the important factors to consider before buying stocks below.
What is the Stock Market?
The stock market is a collection of shares in the ownership of public and private businesses that can be sold or bought by almost anyone with enough capital. Companies are normally listed on the stock markets of the country or geographical location where their headquarters are based.
Investment in these stocks generally yield returns in the forms of dividends and compound interest. Alternatively, you can also make money from the stock market if you buy a stock at a low price and sell it when its price skyrockets. Your sale will then be at a profit.
In the U.S., there are currently thirteen registered stock markets where the two biggest ones are the New York Stock Exchange and the Nasdaq Stock Market.
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.
Why You Shouldn’t Time The Stock Market
Could you perhaps beat the system by timing the market?
Timing the market refers to investors who wait until stocks are at a low price and then selling them quickly once they go up. Many investors make a lot of money through this method but there are also risks and potential losses involved.
Often, while investors wait for the stock price to reach a low point before they buy, they lose out on the dividends they could be earning in the long-run. You could also fall into the common trap where investors panic and sell when the price is low and buy when it’s high. In these situations, investors miss out on the big return to be made from the upwards curve.
The truth is—no one knows exactly what the stock market is going to do. As the pandemic has proven, it just takes one global event to potentially crash the market. Trying to wait for the right time to invest can be a fruitless endeavor.
Christopher C. Davis, portfolio manager for Davis Advisors, explains, “Though tempting, trying to time the market is a loser’s game. $10,000 continuously invested in the market over the past 20 years grew to more than $48,000. If you missed just the best 30 days, your investment was reduced to $9,900.”
What Is Dollar-Cost Averaging?
Sometimes the market can be a bit volatile. In investment the greater the risk, the bigger reward. If you prefer to be more cautious with your investments, however, you can opt for Dollar-Cost Averaging.
Dollar-Cost Averaging is a strategy that lets you regularly and consistently invest the same amount in the stock market up to a certain total. With this strategy, you buy lots of shares when the price is low and fewer shares when the price is high.
Through this system, you can try to make your portfolio less volatile. Although it’s not completely foolproof—it can’t protect you from a market that’s stuck on a long decline.
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. 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.
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.
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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?