Is Now a Good Time to Invest?

Is Now a Good Time to Invest?

One of the most common questions I get is some version of this: “I have some money I want to invest but I’m worried that the stock market might fall soon. Is now a good time to invest or do you think I should wait for the drop?”

Here’s my answer:

Yes, now is a good time to invest…

…but not necessarily for the reasons you’re asking about.

I can’t predict the stock market, and neither can anyone else

In 2013 The CXO Advisory Group released the final results from a 15-year study that looked at the accuracy of stock market predictions from prominent “investment gurus”.

The result? These so-called experts were right 47.4% of the time. You would have been better off flipping a coin.

Now, I’m actually not trying to hate. The point is simply that neither I nor anyone else can tell you what the stock market is going to do with any kind of accuracy.

It could be that today is the very start of a long period of bad returns. It could be that the stock market keeps going up, as it has for the past 7+ years. It could be that it doesn’t do much of anything in the near future. And of course, it could be a combination of all of those things.

I have no idea. And neither does anyone else.

So in terms of the original question, “is now a good time to invest?”, the answer doesn’t have anything to do with a prediction about the future direction of the stock market.

We just don’t know what the stock market will do, especially in the short term, so there’s no point in factoring it into your decision.

But yes, it’s a good time to invest

So, if we don’t know whether the stock market will go up, down, or sideways, how can I confidently say that it’s a good time to invest?

Here are three reasons.

1. Saving matters most

Until you’ve accumulated a lot of money in your investment accounts, your returns simply aren’t going to make much of an impact.

What DOES matter, a lot, is how much you save.

To see this in action, let’s compare two fictitious people, Frank and Sarah. Both of them make $75,000 per year. Frank saves 5% of his income and earns 10% returns. Sarah saves 10% of her income and earns 0% returns.

Despite Frank’s vastly superior return, it takes 14 YEARS before he has more in his account than Sarah. Sarah’s superior savings rate makes up for even her ridiculously low 0% return.

Moral of the story: instead of worrying about what the stock market is going to do, figure out how you can save more money.

2. It’s worse to be OUT of the market than IN

Over the long term the stock market has always gone up. Not every day, or every month, or every year. But over time the return of the stock market has always been positive.

That means that the stock market rises have always been bigger than the stock market declines. Which means that you’re actually risking MORE by being out of the stock market than you are by being in it.

It’s more damaging to your returns to miss one of the stock market’s big rises than it is to participate in one of its big falls.

As the old saying goes: Time in the market is more important than timing the market.

3. If not now, when?

If you don’t feel comfortable investing now, when will you feel comfortable?

Does the stock market need to rise even higher? Doesn’t that only increase the risk that you’re investing at the peak?

Does it need to experience a big decline? At that point won’t you be nervous that it will keep falling even further?

There’s probably never going to be a time where investing feels totally safe. Might as well dive in sooner rather than later!

Two ways to reduce the risk

Now, you might understand and believe the three points above, know that you should invest your money, and still feel nervous and hesitant about doing so.

Don’t worry. All that means is that you’re a normal, functional human being.

Humans experience something called loss aversion, which simply means that we hate to lose more than we like to win. So even if you objectively know that you’re more likely to win, the prospect of losing can enough make you avoid the situation entirely.

Lucky for you, it doesn’t have to be all or nothing when it comes to investing. Here are two easy ways to wade into the water instead of diving right in.

1. Dollar cost average

Dollar cost averaging is the process of investing larger amounts of money in small bits over time.

For example, instead of contributing $4,800 to your IRA all at once, you could contribute $400 per month over the course of a year.

The benefit of this approach is that it decreases your risk. If there’s a big market drop next month, only part of your money will be exposed to it.

The big downside is that you reduce your expected return by temporarily keeping some of your money on the sidelines (likely in a checking or savings account) instead of in the stock market.

It’s a lower-risk, lower-return approach.

2. A little bit of this, a little bit of that

You don’t have to invest ALL of your money in the stock market. In fact, for most people it’s probably a good idea NOT to do that.

Instead, you can create a plan that spreads your money out across different types of investments to decrease your risk.

Instead of investing in just a few companies, you can invest in the entire US stock market. And international stock markets as well.

Instead of investing only in stocks, you can invest some of your money in lower risk bonds to smooth things out.

These simple steps will decrease your investment risk at all times, including any time you have a large chunk of money to contribute.

So, is now a good time to invest?

Yes, it’s a good time to invest. But not because of any prediction about the stock market. Again, I have no idea what it’s going to do over the next month, year, or decade.

It’s a good time to invest simply because it’s always a good time to invest. Because while it’s certainly possible that the stock market will take a dive in the near future, it’s much more likely that over the long term it will keep moving upward.

And you can only take advantage of that if you’re already invested.

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4 Comments... Read them below or add one of your own
  • Rudy June 2, 2016

    With a sound plan and strategy, any time is good to invest.

    But if a person have no clue or goal about how to deploy his money, better avoid investing.

    • Matt Becker June 2, 2016

      I disagree. I don’t think it’s that hard to get up and running with a solid plan with just a few key decisions. I definitely think it’s worth doing a little research before jumping in, but I certainly don’t think that starting without any knowledge means you should avoid it completely. I would encourage people to start here: The Only 7 Investment Decisions That Matter.

      • Rudy June 2, 2016

        Well, it might not be hard for you but a first-time investor is.

        I talk by personal experience. I start investing in 2005 and till 2008 I was a genius of investor, I was up something around 35% during the three years.

        Did I have a strategy? No
        Did I have a goal? Yes, increase my wealth.

        2008 recession and…

        I got hit hard, and I panicked, got out of the stock market in November 2008.

        Your 7 investment decisions are comprehensive and well explain, I can feel you know your stuff.

        Considering most people don’t know how to:

        – Save

        – Pick a broker

        – IRA? Only 53% of US corporate offer IRA matching and the shocking true is 63% don’t even participate. Let alone the remaining 47%.

        – Stock and Bond? Maybe is a McDonald meal.

        – Rebalancing? Am I too fat?
        My investment strategy focus most on rebalancing, while your article is giving an understanding on the subject, there is much more to add and create an explosive portfolio by reducing risks and maximize returns (should I write about it?).

        I think to help people, especially the working class, take a lot of effort by explaining step by step why and how they should save and invest.

        So, I believe firstly a person should acquire knowledge, then invest.

        Would you drive a car without a driving license?

        • Matt Becker June 3, 2016

          “So, I believe firstly a person should acquire knowledge, then invest.”

          Yes, I 100% agree with that. Do some research to understand what goes into making good investment decisions and then get started. The part I disagreed with in your original comment was the idea that if you don’t know how to invest then you should avoid it completely. My point is simply that it only takes getting a few things right (e.g. saving enough, putting it into tax-advantaged accounts, minimizing costs) and it’s therefore well within anyone’s ability to do it well with a little bit of research.

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