Investing: Hold Off Or Dive In?

The stock market has been volatile recently, and it can be tempting to hold off on investing until things feel more stable. However, trying to time the market will often lead to missed opportunities. If you're investing for the long term—five, ten, or even forty years from now—now is as good a time as ever to buy stocks.

When the market is in a slump, stock prices are lower, and it can be a great opportunity to buy shares in companies at a discount. If you only invest when the market is thriving, you will be buying stocks at their highest prices. Over decades, this can add up considerably, and you may end up spending much more overall than if you had also invested during downturns.

Of course, there are situations where it may be best to hold off on investing. For example, if you don't have an emergency fund, it may be wise to focus on building one before investing your spare cash. Additionally, it's best to avoid investing any money you may need in the next few years. While the market should rebound eventually, nobody knows how long this downturn might last, and it can take months or even years to recover fully.

If you're investing for the long term, a market downturn can mean that stocks are on sale. However, if your savings are falling short or you expect to need your extra cash soon, it may be better to focus on those financial goals first.

The pros of a passive buy-and-hold strategy

While there are no clear answers or easy predictions about the best time to invest, a passive buy-and-hold strategy has proven to be a successful approach for many investors. Here are some pros of adopting this strategy:

Historical Success and Simplicity:

This strategy has been proven time and again to produce exponential gains. Historical data supports the success of the buy-and-hold approach, which is preferred by industry giants like Warren Buffett, Jack Bogle, and Benjamin Graham. It is a simple strategy that does not require constant monitoring or complex decision-making.

Reduced Fees and Taxes:

Passive investing is less expensive than active investing. There are ultra-low fees because there is no need for stock pickers or analysts, and the fund follows its benchmark index. The buy-and-hold strategy also provides tax benefits, as investors can defer capital gains taxes on long-term investments, resulting in favourable long-term tax rates.

Long-Term Gains and Reduced Volatility:

The buy-and-hold strategy focuses on long-term gains and is suitable for investors with a long-term mindset. It reduces the impact of short-term fluctuations and market volatility, providing a more stable portfolio over time.

Time Efficiency:

This strategy is ideal for investors who do not have a lot of time to spend researching the market actively. It requires less time and effort compared to active investing, as investors are not concerned with short-term price movements and technical indicators.

Performance and Discipline:

The strategy is based on the assumption that the market will post positive returns over time. By focusing on strong fundamentals and sound management, investors can achieve substantial returns on their capital. Additionally, the buy-and-hold approach requires discipline, as investors must resist the temptation of chasing short-term investment opportunities and remain committed to their long-term strategy.

In conclusion, the passive buy-and-hold strategy offers a straightforward, proven approach to investing, providing long-term gains, reduced fees and taxes, and a more stable portfolio. However, it is important to remember that this strategy also has its drawbacks, including the opportunity cost of tying up capital and the potential for missing out on short-term gains.

The cons of a passive buy-and-hold strategy

The buy-and-hold strategy is a passive, long-term investment strategy where investors keep a stable portfolio over time, regardless of short-term market fluctuations. Here are some cons of adopting this strategy:

Large opportunity cost

Buy-and-hold investors are tied to their assets for the long term, forgoing the opportunity to pursue other investment opportunities that may arise during this period. This is especially challenging if the investor has picked a lagging stock.

Time-intensive

A buy-and-hold strategy requires a long-term commitment, and there is no guarantee that investors will see gains just because they have held an asset for a long time. For example, a sluggish utility stock may yield lower returns compared to a fast-moving biotech company over the same period.

Risk of significant losses

Even well-selected stocks that have been held for many years are not immune to market crashes and corrections. During a prolonged bear market, a buy-and-hold portfolio can lose most, if not all, of its gains. Investors may get overly attached to their underperforming assets and keep averaging down, hoping for a turnaround. However, some stocks may never recover, and holding on to them could wipe out an investor's portfolio.

Poorly diversified portfolios are vulnerable

An investor with significant exposure to a single stock or industry that is wiped out due to technological advances or other reasons can lose a substantial portion of their portfolio. Proper diversification is essential to mitigate this risk.

How to invest for the long term

Understand the Risks

To get a higher return, you generally have to take on more risk. Safe investments such as cash or CDs tend to have low yields, while medium-risk assets such as bonds have somewhat higher yields and high-risk stocks have still-higher returns.

Know Your Time Horizon

The longer you hold an investment, the more time you have to ride out the ups and downs of the market. If you can't commit to holding your investments for at least three to five years, short-term investments such as a high-yield savings account may be a better option.

Pick a Strategy and Stick with It

Choose an investing strategy that suits your goals and risk tolerance, and stick with it. It may be helpful to break your overall time horizon into narrower segments to guide your choice of asset allocation.

Diversify Your Portfolio

By spreading your money across a variety of assets, you can boost your odds of holding a winning investment at any given time over your long investing timeframe. Diversification also helps to reduce risk.

Mind the Costs

Investing costs such as expense ratios and management fees can eat into your gains and exacerbate your losses. Robo-advisors are a more affordable option than financial advisors, but they offer a more limited range of services and investment options.

Review Your Strategy Regularly

Even if you've committed to a particular investing strategy, you should still check in periodically and make adjustments. At a minimum, most advisors recommend reviewing your portfolio at least once a year.

Don't Try to Time the Market

Market timing is extremely risky, and even the most experienced investors get tripped up by it. Instead, focus on investing regularly and taking advantage of dollar-cost averaging.

Match Your Investments to Your Goals

Know your goals, your time frame for achieving them, and how much risk you're willing to take. Most investments fall into one of five asset classes, ranging from "conservative" to "risky". Generally, equities (stocks) are on the riskier end, while cash equivalents (money market funds, US Treasury bills, and short-term CDs) are more conservative.

Stay Invested

If you have some savings to invest, feel ready to buy stocks, and don't need the money for at least five years, then yes, jump in. Even when the market has lows, if you're invested for the long term, you'll have time to recover losses.

Focus on the Long Term

"The best way to build wealth is to stay invested," says Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth. It's easier if you invest only for long-term goals, as short-term drops aren't much of a concern if you're focused on the long term.

How to start buying stocks today

If you have savings to invest and feel ready to buy stocks, there are a few steps you can take to get started today. Here's a guide to help you navigate the process:

• Set Clear Investment Goals: Begin by defining your financial objectives, including both short-term and long-term goals. This will help guide your investment strategy and keep you focused. For example, you may be saving for a home, a vacation, retirement, or a child's education.
• Determine Your Risk Tolerance: Understand your comfort level with the inherent risks of the stock market. Are you willing to take on higher risks for potentially greater returns, or do you prefer stability? Your risk tolerance will influence the types of stocks and investments you choose.
• Choose an Investment Account: Select the type of account that aligns with your goals and risk tolerance. Consider the tax implications of different account types, such as taxable accounts, tax-deferred accounts, and tax-free accounts. Evaluate account fees, minimums, and additional features, such as automatic contributions and access to financial advisors.
• Research and Pick Your Stocks: Look for companies you are familiar with and conduct thorough research before investing. Consider factors such as the company's financial health, performance history, and growth potential. Start with stable, well-established companies with a strong track record and potential for steady growth.
• Decide on the Number of Shares: There is no pressure to buy a certain number of shares. You can start small by purchasing a single share or using fractional shares offered by some brokers. You can always add more stocks over time as you gain confidence and master the process.
• Choose the Right Order Type: Understand the different types of orders available, such as market orders, limit orders, stop orders, and dollar-cost averaging. Each order type has its own advantages and is suitable for different investment goals and strategies.
• Optimize Your Portfolio: Diversify your portfolio by investing in various industries and sectors to reduce risk. Consider mutual funds, index funds, or exchange-traded funds (ETFs) to spread your investments across a wide range of stocks.
• Monitor and Review: Stay informed about the companies you invest in and the overall stock market. Regularly review your investment goals and adjust your portfolio as needed to align with your financial objectives.

Remember, investing in stocks carries inherent risks, and it's essential to do your research and understand these risks before committing your money. Start with small, calculated steps, and gradually build your knowledge and experience in the stock market.

How to evaluate when to buy stocks and when to wait

Evaluating when to buy stocks and when to wait is a complex process that requires careful consideration of various factors. Here are some guidelines to help you make informed decisions:

Long-Term vs. Short-Term Mindset

Investors with a long-term mindset can successfully invest in any market condition. Trying to time the market is often futile and can lead to missed opportunities. Instead of focusing on short-term market fluctuations, adopt a long-term perspective. Remember that stock values are based on future expected earnings, and earnings tend to rise over time, despite occasional downturns.

Identifying Undervalued Stocks

Rather than asking, "Should I invest in stocks now?" the better question is, "Which stocks should I invest in now?" Look for undervalued stocks that are trading below their intrinsic value. Conduct thorough research, analyse financial reports, and compare stocks within the same industry to identify those with strong growth prospects and a competitive advantage.

Market Volatility and Dollar-Cost Averaging

Volatile markets can be intimidating, but they also present opportunities. Consider using a dollar-cost averaging strategy by investing a fixed amount at regular intervals, regardless of market conditions. This approach helps you buy at different price points and reduces the risk of investing a large sum at an unfavourable time.

Long-Term Investment Horizons

If you don't need the money for at least five years, investing in stocks can be a good option. Short-term market fluctuations are less concerning for long-term investors, as they have time to recover from short-term losses. However, for shorter-term goals, consider more conservative investments, such as bonds or fixed-income assets.

Diversification and Risk Management

Diversification is essential to managing risk. Instead of picking individual stocks, consider investing in index funds or exchange-traded funds (ETFs) that provide exposure to a broad range of stocks. This diversification helps protect your portfolio from significant losses if a few individual stocks perform poorly.

Doing Your Homework

Conduct thorough research before investing. Read a company's annual reports, news releases, and investor presentations. Understand the company's business model, growth prospects, and competitive advantages. The more you know about a company, the more confident you can be in your investment decision.

In conclusion, evaluating when to buy stocks and when to wait involves a combination of market analysis, fundamental research, risk management, and a long-term perspective. By following these guidelines, you can make more informed investment decisions and improve your chances of achieving favourable long-term results.

Frequently asked questions