Let’s be honest, 2020 has been a wild year.
In the wake of the COVID-19 pandemic, the market (The S&P 500 index) has fallen by over 30%, and then subsequently rallied to all-time highs. We’ve seen unemployment numbers rise and fall, and encountered our first recession since the ‘08/’09 financial crisis.
With all of this going on, does it make sense to put money in the market right now, or wait until things calm down? Let’s take a look at what you should consider before making a decision.
In order to make any “rational” investment decision the first step should be to zoom out and take a look at the broader picture. It’s really easy to get caught up in day to day (or month to month) market movements and lose sight of historical market trends.
Below, you can see a chart showing the 90+ year history of the stock market.
As you can see. Despite numerous wars, diseases, recessions, and depressions, the market has trended up in the long run.
In fact, $1 in 1926 would be worth $7,030 today if you invested it in a large company index, like the S&P 500.
Remember the panic that the ‘08/’09 recession caused? Now, look at that time period on the chart. It looks like a relatively small dip doesn’t it?
We can’t predict what’s going to happen in the future, but it’s worth noting that, historically, waiting too long to get into the market means missing potential returns.
Remember What The Market Really Is
This is the point where a lot of people get lost and allow emotion, rather than logic, to guide their decisions.
For many people, investing can feel like a random gamble. You put money in and hope that this unknown force called “the economy” does well until you eventually have to pull the money out.
You’ve been told that investment accounts normally go up in the long run, but you also know that it’s possible for them to go down. And that’s scary. You don’t want to lose your hard-earned money.
Well, here’s something to think about that may help with the “unknown” nature of the stock market.
When you invest in the market, you’re not just throwing money into a big pot that’s somehow tied to the US economy. You’re actually buying fractional pieces of real companies. Companies like Ford, McDonalds, Apple, and others.
When the market drops like it did earlier this year, ask yourself this question:
“Is Apple (or McDonalds, or Walmart, etc…) actually worth 30% less than it was a month ago?” Your answer will probably be “No”.
Then take it a step further. Ask yourself “will these companies be worth more in 3 years than they are right now?” In most cases, you’ll probably say “yes”.
If that’s the case, then why wouldn’t you want to invest in the market? Yes, there is a potential for your account to fluctuate, but if you believe that companies will continue to innovate and grow, you have the potential to participate in their success.
So I have some cash saved up. Should I invest it all at once, or incrementally over time?
So, we’ve agreed on the fact that now is as good of a time as any to start investing. What’s the best strategy to put that cash to work?
Well, there’s a couple of different ways to go about this, and it ultimately comes down to personal preference and risk tolerance.
The first is pretty straightforward. Invest it all (minus what you need in an emergency fund) now and have confidence that over the long-run, the market will continue its upward trajectory. You just have to have an understanding, with this strategy, that you could see short-term losses in the account.
When the market is going through a turbulent period, as it has in 2020, it can seem risky to put your entire life savings into the market at one time. You can look at the chart above and understand that over the long-run, you’ll likely turn out just fine, but still be wary about watching your accounts drop in the first year.
If that’s the case, you may want to consider a technique called Dollar Cost Averaging. With this strategy, you spread out your investments over a set period of time.
Let’s say you have $30,000 that you want to invest, but you’re fairly certain that the market will drop in the next 6 months. You can invest $5,000 per month for the next 6 months to spread out your exposure to the market. That way, if the market drops in that time period, you’re able to get more shares for your money.
Now, if the market continues to climb, while you’re dollar cost averaging, you may wish that you would have put the whole $30k in at the beginning. But in the end, the difference in your long-term returns will be small, and it’s a small price to pay for your peace of mind in the short-term.
Now is Better Than Later
As you can see in the chart above, over the long-run, investing “now” almost always beats investing “later”. However, as always, it’s important to be sure that you have a long-term time horizon and an adequate emergency fund before you start investing.
If done correctly, investing in the market can be an incredible tool to build long-term wealth for you and your family. It can be intimidating, so if you’re unsure where to start, it may make sense to hire a professional for personalized advice.
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All types of investing and investment strategies involve risk including the potential loss of principal. Dollar-cost averaging does not ensure a profit or protect against a loss in declining markets. Dollar-cost averaging involves continuous investment in securities regardless of the fluctuating price levels of such securities. Investors should consider their financial ability to continue making purchases through periods of low and high price levels.
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