Investing Now: A Smart Move Or Risky Gamble?

Investing can be a great way to grow your money, but it's important to remember that it comes with risks. The best investment for you will depend on your risk tolerance, timeline, and other factors. Here are some things to consider when deciding if it makes sense to invest now:

- Goals: What you want to spend your money on and when you want to spend it will be a significant factor in deciding where to put your money. Generally, investing in the stock market is better for long-term goals, while savings accounts and other bank products are better for short-term goals.

- Risk tolerance: Different savings vehicles come with varying amounts of volatility. If you are risk-averse, you may want to consider low-risk products like high-yield savings accounts, CDs, or government bonds. If you have a higher risk tolerance, you might opt for riskier investments like stocks or corporate bonds, which offer the potential for higher returns.

- Debt: When deciding how to save or invest, balance your choices with paying down existing debt, especially high-interest debt like credit cards.

- Time in the market vs. timing the market: Trying to time the market will often lead to missed opportunities. Instead, focus on staying invested for the long term. Even during market downturns, consistent investing can pay off in the long run.

- Dollar-cost averaging: Consider treating investment contributions like recurring subscriptions. This strategy, known as dollar-cost averaging, involves investing a specific dollar amount at regular intervals rather than trying to time the market. It can help you buy at various prices that average out over time.

The stock market has historically persevered through challenging periods

Secondly, being out of the market, even for a short period, can significantly impact long-term growth. Investors who miss out on just the best few days in the market can reduce their potential gains. Therefore, staying invested is crucial to capturing the market's long-term returns.

Thirdly, stocks have historically risen and demonstrated resilience during challenging periods, including wars, recessions, and even the COVID-19 pandemic. They tend to recover quickly after economic downturns, often surpassing pre-crisis highs. For example, in 2020, despite the global pandemic and severe recession, the stock market ended the year with almost a 20% gain.

Additionally, investing in the market for a longer period increases the likelihood of positive outcomes. While short-term performance can be volatile, the odds of a positive return improve the longer an investor stays in the market. This is because, over time, the market tends to trend upwards, providing significant returns to patient, long-term investors.

Finally, political events, such as which party controls Washington, have historically had little impact on stock returns. Therefore, investment decisions based solely on election outcomes may not be prudent. Instead, focusing on long-term investment strategies and staying invested through market cycles is generally a more successful approach.

Staying out of the market may hinder your financial goals

There are several reasons why staying out of the market may not be the best idea. Firstly, it's important to understand the difference between saving and investing. Saving typically involves putting money into a low-risk, low-return account such as a savings account or certificate of deposit (CD). These options offer quick access to funds and a lower level of risk but often provide lower returns compared to investing.

On the other hand, investing involves buying various financial instruments such as stocks, bonds, exchange-traded funds (ETFs), commodities, and real estate. Investing carries a higher risk than saving but also offers the potential for higher returns and wealth growth.

By staying out of the market, you may miss out on the opportunity to grow your wealth over time. Stock markets tend to rise and fall, and while it can be tempting to take your money out during volatile periods, doing so may expose you to more risk.

• Time in the market: Historical data shows that staying invested in the stock market over the long term tends to generate better returns than trying to time the market. By staying invested, you benefit from compound growth, which can lead to significant gains over time.
• Missing out on gains: If you stay out of the market, you may miss out on potential gains when the market recovers. Trying to time your entry and exit points precisely is challenging, and you may end up selling low and buying high, which is the opposite of a good investment strategy.
• Inflation risk: Holding cash may provide a sense of security, but it does not protect against inflation. Over time, inflation erodes the purchasing power of cash, resulting in an opportunity cost.
• Psychological factors: Investing can be an emotional rollercoaster, and it's natural to feel nervous during market volatility. However, making investment decisions based on fear or greed can lead to hasty choices that may be detrimental in the long run.
• Diversification: Investing allows you to diversify your portfolio across different asset classes, sectors, and industries. Diversification helps to reduce risk and improve the potential for returns.
• Compounding returns: Many investments, such as stocks and bonds, provide returns in the form of dividends, interest, or capital gains. These returns can be reinvested to generate compounding returns, accelerating your wealth accumulation.

In conclusion, staying out of the market may hinder your financial goals by limiting your potential for wealth accumulation. It's important to remember that investing carries risk, and there are no guarantees of returns. However, by staying invested and adopting a long-term perspective, you increase your chances of achieving your financial objectives.

Putting cash to work sooner may offer benefits

History shows there's no "wrong" time to get in the market

If you're holding a large amount of cash because you're worried about investing your money at the wrong time, you may be doing yourself a disservice. Research has shown that even if money is invested at the "worst" possible time each year, it would still significantly outperform a cash allocation over time.

Since it's difficult, if not impossible, to identify when markets are at their peak or have reached their lowest point, most investors are better off simply investing their money on a regular basis without regard for timing.

Being out of the market for even a short time can significantly reduce growth

When you get into the market isn't likely to make a big difference in your long-term growth potential, but being out of the market, even for a short period, can. A hypothetical investor who missed just the best five days in the market since 1988 could have reduced their long-term gains by 37%.

Stocks have tended to rise even amid upheaval and uncertainty

History shows that markets have persevered through times of strife and uncertainty. Stocks have historically shown resilience during short-term volatility, which could potentially lead to long-term gains for investors.

Stocks have, on average, historically recovered just 11 months after a recession began, often surpassing their pre-recession highs. Getting or staying out of the market when times seem tough could result in missing out on potential recovery periods.

Investing in the market for a longer period may increase your chances of positive outcomes

The longer you stay invested, the more likely you are to see a positive outcome. While stocks have tended to have a positive outcome on just over half of the days in the short term, this number increases the further out you go.

Rising deficits and persistent inflation may pose a risk to cash portfolios

If you are concerned about rising deficits and persistent inflation, it's important to understand that all investments carry some level of risk. If inflation stays at current levels or rises over time, or if the deficit continues to rise and leads to higher interest rates, it may make sense to invest in a diversified portfolio to help your wealth grow.

Time in the market beats timing the market

When you start investing isn't as important as how long you stay invested. If you're investing for the long term, short-term drops aren't much of a concern, and it's the compounding gains over time that will help you hit your financial goals.

One of the best strategies for remaining calm and staying invested during periods of volatility is to treat investment contributions like recurring subscriptions, a technique known as dollar-cost averaging. Through this approach, you invest a specific dollar amount at regular intervals, rather than trying to time the market.

Being out of the market can significantly reduce growth

Even if you're holding a large amount of cash because you're worried about investing at the wrong time, you may be doing yourself a disservice. Research has shown that even if money is invested at the "worst" possible time each year, it will still significantly outperform a cash allocation over time.

For example, a hypothetical investor who missed just the best five days in the market since 1988 could have reduced their long-term gains by 37%.

History shows that there's no "wrong" time to get in the market. The stock market has ultimately persevered in the face of even the most serious challenges, and stocks have historically shown resilience during short-term volatility, which could potentially lead to long-term gains for investors.

Therefore, it's important to get invested and stay invested.

Stocks have tended to rise during upheaval and uncertainty

History has shown that there is no "wrong" time to invest. In fact, stocks have tended to rise during upheaval and uncertainty. While past performance does not guarantee future returns, markets have persevered through times of strife and uncertainty. Be it war, recession, or even the COVID-19 pandemic, stocks have historically shown resilience during short-term volatility, which could potentially lead to long-term gains for investors.

Stocks have, on average, historically recovered just 11 months after a recession began, often surpassing their pre-recession highs. For example, despite the 2020 pandemic and the resulting severe recession, the stock market was up almost 20% by the end of the year.

Therefore, getting or staying out of the market when times seem tough could result in missing out on potential recovery periods.

Frequently asked questions