Many are asking me: is now a good time to invest? A great question that is understandable to ask right now, given the circumstances.
Currently, the global stock markets have significantly dropped over the last few weeks. The coronavirus has put a great deal of uncertainty into the market.
I want to start by telling you that it’s very important to get look after your financial health in times of coronavirus. When you have financial peace, you can start focussing on other things that are important. Like family and physical health.
Now that is out of the way, let’s go into if now is a good time to invest and we will talk a bit about timing the market & time in the market.
Is Now A Good Time To Invest?
Short answer: yes, now is a great time to invest.
BUT, yesterday would have been even better! There is this saying: “the best time to invest was yesterday, the next best time is now”.
Why is that?
- The general trend of the market is up over the long term
- The magic of compounding interest year over year
Compounding interest means that your investments earn interest. The next year, your interest is earning interest. That interest on interest effect is called the compounding effect.
Compound interest will accelerate the growth of your portfolio. Over time your interest has the opportunity to earn interest. This will make your portfolio grow even faster.
If we look at history, the investing approach with the most returns is surprisingly not following the latest popular stocks or trying to time the market.
BUT, before we get to that. In order to start invest, you need to get over your fear of the stock market. The stock market is not scary.
Actually, it’s quite easy to start investing in a couple of simple steps. Check out there 5 simple steps to start investing your first dollar!
Timing The Market Rarely Works
When you say the best time to invest is yesterday, how do you know that? What if the market suddenly crashed? There are so many unknowns, how can you say the best time to invest was yesterday?
There is one other great rule of thumb for investing that I want to share with you: time in the market beats timing the market.
Trying to time the market is such outdated financial advice.
The market will correct at certain points in time. On average, it corrects 10% once a year and 20% every seven years.
When you are timing the market, you are guessing when the market is high and when the market is low.
The thing is, you don’t know when the correction will happen or how much the correction will be
The best case scenario is that you are wrong and don’t buy your shared at optimal times.
The most probable scenario is that you miss a couple of the best days of the stock market. If you missed the 10 best days of the stock market between 2004 and 2019, your return will be an average of 4.11% instead of 9%.
That’s almost a 5% difference in total annual return only coming from 10 days!
As we don’t know what will happen in the near future, we can mistime our timing of the market.
The simplest way to get your maximum return is to ride the entire wave, up and down.
That’s not easy, but it is simple.
To repeat: you don’t know when the stock market is at its lowest or highest point. No one does. Better on the stock market is known as trying to time the market.
What To Do Instead Of Timing The Market?
It is hard to know when is the right moment to buy and sell in the market. What can we do instead? Simply invest regularly.
That means that you’re investing monthly $200.
There will be some months where you will pay $100 per share and you will buy 2 shares. There are some other months where you will pay $50 per share and you will buy 4 shares.
Do you see what that means?
Some months you will buy stocks at a high price and some months you will buy the same stock at a low price. You will invest during the good and the bad times.
It means that no matter what the market is doing, you are investing periodically. This is also known as dollar-cost averaging (DCA).
Imagine that you’re buying market $200 worth of stocks monthly. You really want to invest in Disney.
In the first month, you buy 2 shares for a price of 100$. The second month, you buy 5 shares for a price of 40$ each. The third month, they are 50$ and you buy 4 shares. The fourth month you buy 8 shares for 25$ each. The fifth month you buy 4 shares for 50$ each.
That means you get to buy 37 stocks for your $1400, with a total current value of $1480.
|Month||$ Invested||Share Price||Share Purchased|
What if you would have started investing, stopped while the market was going down, and with the first sign of the market going up again you started to buy. Because you waited a bit for the market to start its upward trend, you did not really get them for the best price available.
With your $1400 now, you could only buy 32 shares for a total current value of $1280.
|Month||$ Invested||Share Price||Share Purchased|
Because of dollar-cost averaging, you have a higher stock value and a higher total stock value.
Do you want to maximize return? See what’s the best to invest in Large Cap, Mid Cap, or Small Cap stocks.
One side note: in investing, past performance is not an indicator of future results.
Can Experts Time The Market?
Do you know those people that get paid to trade stocks all day? They are the ones that are actively managing funds. The only way that their job and their significant salaries can still be there, is when they consistently outperform the market.
Over a 15-year horizon, less than 6% of all mutual funds outperform the market. To add to your disbelief, on average they underperformed 1.1% per year.
Those smart and hardworking people who are specialized in trading shares, still underperform compared to the market.
Okay, okay. What about the best of the best?
If there is skill involved when it comes to picking those stocks, funds that outperform the market once should do it consistently.
When we look at another report of the very best, we can see how much funds that finish in the top 25% can maintain that. After two years just 1.94% of the funds were able to maintain their performance. After five years, only 0.35% could keep their performance up.
What can we learn from that?
Nobody can time the market and be correct constantly.
No one knows which way the markets are going to move.
Time In The Market Beats Timing The Market
Until now you’ve learned why timing the market is a terrible idea and what you can do instead.
Now let’s get to why it is important to start investing as soon as you can.
For that, we need to look at history. The S&P 500 stock index with the biggest 500 companies from the US, to be exact.
What we can see is that the market has dropped in 2008. Still, the returns that you would have made over that period of time are significant. From the recession until now, the market has more than doubled.
When you invest, your money appreciates over time. The moment you keep that appreciation in your portfolio, you can start to earn compounding returns. You can really start to earn interest over interest.
That’s what makes investing so attractive.
On the flip side, that is also what you need to be aware of.
When the markets are going down, it is important that you can stay invested in the market and don’t need to withdraw any of your investments before the market has the opportunity to recover. That’s why it’s important to invest in the long term.
The longer you have before you need the money, the more risk you can take by investing in stocks. If you inch closer to the day where you may need the money, you can turn towards bonds more in your portfolio.
Ignore The Noise
There are many headlines going about the stock market. All the time.
It doesn’t matter if it goes up, down, or sideways.
My advice: keep your cool and know how to react to stock market drops.
If you find it hard to keep your emotions in check, make sure you deposit the same amount of money monthly in your investment account. Check on them quarterly.
Before You Start Investing: Your Personal Situation
For everyone the approach is different.
Are you having a hard time getting your finances in order? Make sure you do these things BEFORE you want to start to invest:
- Know what is coming in and going out by creating a budget. As an easy start point, the 50/30/20 rule would suffice.
- Build an emergency fund. Three to six months of costs is recommended.
- Paying off debt. Paying off debt with more than 5% interest is a great rule of thumb here.
All in all, the short answer is: yes, now is a good time to invest.
Taking into account that the market historically goes up over time, it is great to start your investing adventures now. Your money will start to earn money for you, which will only grow due to compounding interest.
Timing the market rarely work, as even experts who are getting paid for this rarely outperform the market. The average is even underperformance at 1.1% per year.
Before you consider to start with investing, make sure that your finances are in order. You want to have an emergency fund, have paid off loans with more than 5% interest, and you want to where your money is going.
What do you think, is not a good time to invest?