Market Volatility: Should You Invest Now?

There is no definitive answer to the question of whether or not now is a good time to invest. However, experts generally agree that, for long-term investors, a market downturn can mean stocks and other investments are on sale.

If you're investing for the long term, short-term drops aren't a major concern. It's the compounding gains over time that will help you hit your financial goals.

According to Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth, The best way to build wealth is to stay invested, but I know that can be challenging.

It's easier if you invest only for long-term goals. If you need the funds for a large purchase or emergency in the next five years, investing may not be the best option, as the stock or mutual fund you purchase could drop in value in the short term.

Trying to time the market will lead to missed opportunities more often than better returns. As legendary investor Warren Buffett once said, If you wait for the robins, spring will be over.

The market is unpredictable in the short term

The stock market is influenced by a series of factors that are impossible to predict with accuracy. The market is driven by the emotions and investment decisions of millions of investors around the globe, and these opposing views can frequently swing between bullish and bearish sentiments.

News and Events

Daily news and events, both macro and micro, can impact stock prices. Positive or negative developments at a macroeconomic level, such as global economic trends, can move the market. Similarly, company-specific news like earnings reports, analyst recommendations, and even rumours can affect how investors perceive a particular stock.

Investor Sentiment

The two primary emotions that drive the market are fear and greed. Fear typically arises when the market starts to plunge, while greed sets in when the market reaches new highs. These emotions can change daily as stock prices fluctuate, and there is a fear and greed index that attempts to quantify these investor sentiments.

Earnings Reports and Outlook

When companies release their financial results, stocks tend to move in reflection. Additionally, companies often provide their own estimates of future performance, which can further influence stock prices. Positive earnings and a bright outlook will generally lead to upward price movement, while poor earnings and a negative outlook will have the opposite effect.

Expectations

Expectations about the future, both short-term and long-term, drive investor decisions. These expectations are based on personal perceptions of various factors and can differ from investor to investor, making the market's direction unpredictable.

Economic Indicators

Economic indicators reflect the performance of companies within an economy and can directly impact stock prices. For example, interest rate changes by central banks can affect borrowing costs for companies and consumers, influencing their spending and investment decisions.

Interpretations Differ

All investors interpret the above factors differently, making the market's direction even more unpredictable. The stock market essentially finds a consensus price that investors are willing to pay for assets based on supply and demand, and this price can change rapidly as new information arises.

While some traders attempt to predict market movements, it is impossible to do so with complete accuracy. The market's unpredictability is driven by the collective actions and sentiments of millions of individuals, each with their own reasons for buying or selling. This complexity is what makes the market so erratic and volatile.

Long-term investing is a safer strategy

Time in the market beats timing the market

If you're looking to invest for the long term—five, 10, or 40 years from now—now is as good a time as ever to buy stocks. Despite ongoing recession fears, it's important to remember that the market is forward-looking. Stock values are based on future expected earnings, and earnings tend to rise over the long run.

You can't predict short-term market movements

It's impossible to predict short-term market movements. Instead of asking "Is now a good time to invest?", ask "Which stocks are undervalued right now?".

Long-term investing helps you avoid missed opportunities

Trying to time the market will lead to missed opportunities more often than better returns. Both passive index fund investors and individual stock investors will likely be better off consistently buying shares and ignoring the daily ups and downs of the market.

Long-term investing helps you avoid losses

If you invest consistently over time, you'll end up catching a correction or a stock market crash on occasion. Those are opportunities to invest even more than usual if you can swing the cash flow.

Long-term investing is less stressful

Long-term investors don't need to focus on the market all the time like short-term traders do. You can invest your money regularly on autopilot and then spend your time on things that you enjoy.

Long-term investing helps you make more money

The longer you're invested, the more of the market's average 10% annual return you're likely to earn.

Dollar-cost averaging can be a good strategy

Dollar-cost averaging is a strategy that can help you lower the amount you pay for investments and minimize risk. It is a time-tested strategy that involves investing a fixed dollar amount on a regular basis, regardless of the share price. This strategy can help you develop a disciplined investing habit, be more efficient in how you invest, and potentially lower your stress level and costs.

• It establishes good investing habits. By setting up regular, automatic contributions, you're less likely to miss the money you invest and more likely to stick to your plan.
• It keeps you open to opportunities. Market timing is almost impossible, even for professional investors. Dollar-cost averaging helps ensure that you'll be able to take advantage of buying opportunities.
• It may help prevent your emotions from undermining your portfolio. With dollar-cost averaging, you're investing smaller sums of money over time, making it easier to stomach a poorly timed investment.
• It helps you get your money to work consistently, which is a key factor for long-term investment growth.
• It may lower your average cost per share. By investing a fixed amount regularly, you buy more shares when prices are low and fewer shares when prices are high. Over time, this can lower your average cost per share compared to buying all your shares at once.

Dollar-cost averaging is particularly useful if you are a beginner investor with smaller amounts to invest, or if you are not interested in the research that goes into market timing. It is also a good strategy if you are making regular investments in retirement accounts, such as an IRA or 401(k), or if you are unlikely to continue investing in down markets.

However, dollar-cost averaging may not always be the best strategy. If you have a large sum to invest, investing it as soon as possible may result in higher returns. Additionally, if the price of the investment rises while you are implementing a dollar-cost averaging approach, you will end up buying fewer shares than if you had made a lump-sum investment. Dollar-cost averaging may also lead to lower returns if the investment rises significantly after your initial trade.

Overall, dollar-cost averaging can be a good strategy for investors who are looking to reduce risk and develop disciplined investing habits. It is important to consider your investing objectives and time horizon when deciding whether to use this strategy.

The best time to invest is as soon as possible

Investing can be daunting, especially for beginners. While there is no perfect time to invest, the best time to invest is as soon as possible. Here are some reasons why:

• Starting early is crucial: In a market that has generally gone up more than down over the years, investing early is ideal. Historical data shows that staying invested for longer periods increases the likelihood of seeing returns. For example, between 1950 and 2023, staying invested in the S&P 500 for fifteen years had a 100% chance of seeing some return, despite market fluctuations.
• Embrace the uncertainty: Predicting short-term market movements is nearly impossible, and it's challenging to know where the economy or stocks are heading in the next 12 months. Stocks can provide ample returns over the long term, and investors need to be prepared for market volatility.
• Focus on long-term gains: The stock market tends to rise over the long run. Even if you experience short-term losses, trust in your research and remain patient. Consistency is key—automating your investments through recurring transfers can help you stay on track.
• Don't try to time the market: Trying to time the market often leads to missed opportunities. Instead, focus on finding undervalued securities. Consistently buying shares and ignoring the daily ups and downs of the market is a better strategy.
• Take advantage of market downturns: During broad market declines, you're likely to find more opportunities to buy shares of undervalued companies. These can be great opportunities to act on your research and invest in companies trading below their previous values.
• Invest regularly: A consistent investment strategy, such as dollar-cost averaging, can help you remain calm during volatile periods. By investing a fixed amount at regular intervals, you buy at various prices, which theoretically average out over time.
• Diversify your portfolio: Diversification can help ease market stress and insulate your portfolio from volatility. Consider spreading your investments across a mix of aggressive and conservative assets.

Remember, investing comes with risks, and past performance does not guarantee future results. It's important to know your risk tolerance, set clear financial goals, and stay focused on your investment strategy.

It's important to invest in the right places

• Risk tolerance: How much risk are you comfortable with? If you're nearing retirement or are generally more conservative, you may want to allocate a larger portion of your portfolio to less risky investments like savings accounts, CDs, or bonds. If you have a higher risk tolerance and a longer time horizon, you might opt for riskier but potentially more rewarding investments like stocks or real estate.
• Time horizon: Are you investing for the short-term or long-term? If you need the money in the near future, safer and more liquid investments like savings accounts or money market accounts may be more suitable. If you're investing for the long-term, you can consider less liquid investments like stocks, real estate, or retirement accounts.
• Knowledge: Different types of investments require varying levels of knowledge and research. For example, investing in individual stocks requires a good understanding of the company, its industry, finances, and competitors. If you don't have the time or expertise, you might opt for more passive investments like index funds or mutual funds, which provide instant diversification.
• Amount to invest: The amount of money you have to invest may also influence your investment choices. Some investments, like rental properties or certain CDs, may have minimum investment requirements. If you have a smaller amount to invest, you might consider robo-advisors or fractional share investing, which allow you to invest in a diversified portfolio with less capital.
• Investment goals: Are you investing for retirement, college savings, or another financial goal? Different types of accounts, such as 401(k)s, IRAs, or 529 plans, offer tax advantages for specific goals. It's important to choose the right type of account based on your investment objectives.
• Diversification: Diversifying your investments across different asset classes and industries can help reduce risk. Instead of putting all your money in one stock or one type of investment, spreading it across a variety of investments can lower the impact of any single loss.
• Research and analysis: Before investing, it's crucial to thoroughly research and analyze the investment opportunities. This includes understanding the company's financials, industry trends, competitive landscape, and potential risks. Making informed decisions based on research can help you make more successful investments.

Frequently asked questions