Is now the right time to risk money in the current stock market?
Author: Tim Thomas
Source: Wealthtender
Market timing is challenging. In theory, taking money out just before stock prices plummet and reinvesting when prices are at rock bottom makes sense. However, because the market is sometimes unpredictable, knowing exactly when to sell is practically impossible.
Furthermore, selling at the wrong time can be a costly mistake. Assume you remove your funds today, anticipating a drop in stock prices. However, if the market rises, you'll lose out on those profits. If you decide to reinvest later to get back into the market, you may end up paying a higher price.
Even if you decide not to sell and stop investing, there are risks. The market is continuously changing and will undergo ups and downs regularly. If you only invest while the market is booming, you'll not only be buying at higher prices, but you'll also be missing out on precious time for your money to grow.
Is it the right time to invest in the current stock market?
Even when the market is volatile, it usually pays to keep investing. However, it would be best if you double-checked that you have a sufficient emergency reserve. If you continue to invest, the key to surviving periods of market volatility is to stick to solid exchange-listed stocks and have a long-term perspective.
1) Understanding the difference between Main Street and Wall Street
The stock market's quick recovery in 2020 ran counter to the US economy. However, a deeper examination reveals that this disparity may not be as confusing as it appears.
The stock market reflects investor expectations for the future, not current events. While retail investors (individuals) are more likely to purchase and sell based on daily news, institutional investors (businesses such as banks and wealth management organizations) are more likely to look forward. It means the stock market's performance may not necessarily reflect current economic conditions.
The S&P 500 is also market-cap-weighted, which means that larger companies have a higher impact on the index's performance. Despite the ongoing economic challenges caused by the pandemic, many of the largest firms in the index are in tech and propelled the S&P 500 to record highs. When investors lose faith in the tech stocks, those same businesses drive down the index (even if some economic indicators are positive).
2) Time in the market vs. market timing
Staying invested is the best way to generate wealth. It's simpler if you invest for the long run. Because the stock or mutual fund you buy will likely lose value in the short term, you don't invest the money you may need in the following five years.
If you need the money for a big purchase or an emergency, you might have to sell your investment before it recovers, resulting in a loss. Short-term declines, on the other hand, aren't a big deal if you're investing for the long haul. Compounding gains over time are what will help you reach your retirement or long-term financial objectives.
Staying invested is the best way to generate wealth. It's simpler if you invest for the long run. Because the stock or mutual fund you buy will likely lose value in the short term, you don't invest the money you may need in the following five years. If you need the money for a big purchase or an emergency, you might have to sell your investment before it recovers, resulting in a loss.
Short-term declines aren't a big deal if you're investing for the long term. Compounding gains over time will help you reach your retirement or long-term financial objectives.
3) Take it gently while entering the stock market
Treating investing contributions like a recurring subscription — a practice known as dollar-cost averaging — is one of the best ways to stay calm and invested during periods of turbulence.
Instead of timing the market, you invest a specified dollar amount once or twice a month. You're buying in at different prices, which should, in theory, average out over time.
So, how do you get started with dollar-cost averaging in the market? A common technique is combining this with equity funds, such as exchange-traded funds (ETFs).
ETFs, combine a number of different equities into a single investment, allowing you to have exposure to all of them. For example, if you bought an S&P 500 ETF, you would own a piece of each business in the index. ETFs allow you to swiftly establish a well-diversified portfolio rather than investing all of your money in a few individual stocks.
This article was written by Tim Thomas from Wealthtender and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.
