We’re currently facing an unprecedented event with the global pandemic caused by a novel coronavirus that began in March 2020. In a matter of weeks, we went from business as usual to almost no business at all.
Most companies have been forced to close their offices and move employees to remote, work-from-home positions — and those were the lucky ones. Many others have been required to shut down and lay off their entire workforce.
The shock to the economic system has been staggering, with unemployment claims jumping to record highs and consumer spending taking a sharp nosedive.
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And while the economy is not the same thing as the stock market, they do play off each other. The market reacted to all of the grim news and ongoing uncertainty by taking investors for a roller-coaster ride volatility and ended Q1 of 2020 down more than 20% off recent peaks.
So … Is Now a Good Time to Invest?
This sounds like a very unpleasant picture to paint about the state of the financial world. Hearing this and all the other news you’ve no doubt been consuming as of late can make you feel like the last thing you want to do right now is to further expose yourself to market and investment risk.
But if you’re a long-term investor, now might actually be an ideal time to invest.
Why? Because continuing to contribute to your investments right now — or even putting more money in the market — is the only way dollar cost averaging can work for you.
Think about it: The point is to average out the prices at which you buy into the market. If you’ve consistently contributed to your retirement and investment accounts over the last 10 years, you’ve been buying in at higher and higher prices.
If you stop contributing now, that means you get no opportunity to buy in at lower prices, and bring the average cost of investing down — leaving you with more returns to keep in your pocket.
So, in general, yes, now could be a great time to invest into the market … if your situation allows you to take advantage of this opportunity. Here’s how to determine what makes the most sense for you.
You May Not Want to Invest More Right Now If …
First, let’s look some times when it doesn’t make sense to throw extra cash at the market just because values are off their peaks.
No. 1: You have a short time horizon
If the money that you’re thinking about investing may be needed in the short-term, putting those funds into the market now is a no-go. This is true no matter what the market or economic environment looks like.
Investing should be reserved for when you have a long-time horizon. As we have seen, the market can be extremely volatile and rise or drop quickly. At one point in March, the S&P 500 was down 34%!
We know the market trends upward over time, but “time” is the key word here. That could mean 20 to 30 years. If you need your money next year, you take on far too much risk of loss and should seek a safer vehicle for your cash.
No. 2: You’re feeling insecure about your job
Even if you have cash that you don’t plan to use for many years, investing it into the market might not be a wise move if you feel your current job is unstable, your income source could dry up in the near future, or you don’t have an established emergency fund.
In this case, your first order of business should be building up your cash reserves. That may mean missing an opportunity to get into the market at a lower cost than you could have done just a few months ago … but having cash available in case things continue to go more sideways than they already have should be your priority.
No. 3: The risk factor is too much for you
Finally, jumping even further into the market right now may not be for the faint of heart or the extremely conservative investor. If you are risk averse, you may not like what we continue to see in the markets over the next few months or even the next year.
Just because the market dropped significantly does not mean it found a bottom. We could have farther to fall in the short term before we can bounce back for long-term growth.
And even if you don’t see yourself as risk-averse, I might recommend against investing more in the market if you’re going to sit and watch your portfolio jump around every day. That’s an unpleasant experience for most investors, even when you logically understand the concept of volatility and risk.
The more you watch the daily market movements, the more likely you are to feel overly emotional about your investments and make an irrational decision with your portfolio in the future.
None of this necessarily means you need to stop contributing to the market. If you have a set plan, you probably want to stick to it. This is only to help you determine if you should allocate more than your usual contribution amount, and if you’re checking any of the boxes above, that might not be the wisest move for you at the moment.
But otherwise? This could be an opportunity.
Now Is a Good Time to Invest If You Meet These Criteria
If you have cash available that you don’t have earmarked for any other purpose and can commit to keeping that money invested for the long term, investing now could pay off in the future.
Bear in mind “the future” means at least 10 years from now, but ideally, more like 15, 20 or even 30.
But first, you need to ensure that:
- You have job security.
- You have an emergency fund (in case your job ends up being less secure than you thought).
- You don’t have any credit card or high-interest-rate debt that you should pay off first.
Stocks are now over 20% cheaper then where they were a month ago, and while we don’t know if the volatility has ended, we do know equities aren’t as expensive as they were before. This could be a deal for a long-term investor.
If you think you want to invest more, make sure you commit to the decision. Act now, and don’t try to wait to see if it drops further or engage in any other kind of market timing exercise. Getting the timing precisely right is more a matter of luck than skill, and it’s far more important to simply be in the market sooner rather than later.
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