“Should I invest some of the cash I've been sitting on?”
I work with several successful young professionals who have done well in the past decade – building careers and businesses that have generated substantial cash flow and are poised to build a sizable net worth through investing. But they haven’t experienced a combination of such volatile events that the United States hasn’t seen in many years — a bear stock market, falling prices for cryptocurrencies, rising inflation, skyrocketing prices for homes and gasoline and the war in Ukraine.
Many people in their 30s and 40s are now hesitant to invest new money in the stock market when they only see it dropping. While no one has a crystal ball, a buying opportunity does exist – under the right conditions. Remember, one of the oldest rules of investing is to buy when prices are low.
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For those with cash to invest – either from a recent bonus, the sale of a rental property, an inheritance or just plain, steady savings – I ask them to answer three questions before deciding to invest new money in the stock market.
Is Your Emergency Fund Healthy?
It’s important to have at least three to six months of living expenses in savings. And even more money may be needed if you believe you may lose your job if the economy weakens or if your customers aren’t able to pay you.
No one wants to be forced to dip into their stock portfolio to pay for these expenses while the market could be moving lower. Since nearly everyone is paying more each month for food, gasoline and other essentials, scrutinize your budget to see what that monthly budget truly is now.
If your emergency fund is healthy and you are confident you can pay the bills for the next several months, a rising young professional with a 401(k) and other retirement plans should continue to deposit a percentage of their pay into these accounts. If you are a business owner, now may be a good time to set up a retirement plan, if you haven’t already done so.
Do You Have Other Goals for Your Money?
A client asked me recently if the money they’ve socked away for a down payment on a house should instead be invested into the stock market.
Even though housing prices and interest rates have jumped dramatically in recent months, my answer was “no.” Purchasing a house is a long-term investment that not only provides shelter for your family, but builds long-term wealth.
On the other hand, stock prices may linger at lower levels for some time. This answer also applies to other purchases that are needed to improve your life, such as paying college tuition bills or buying a new car. If there are no major expenses coming up, let’s keep going.
Are You Looking to Make a Quick Buck?
Investing in the stock market is a decision with long-term consequences. Investing steadily for several years, even decades, is the key to building wealth. Without that mindset, anyone throwing money at a stock now may likely decide to sell at an inopportune time and make an expensive mistake.
Many of my young professional clients just missed experiencing investing during the Great Recession of 2008-2009. A lesson that can be learned is that many investors at that time cashed out of their stocks and left the stock market. They let their emotions take over and missed part or all of the 13-year bull market that built wealth for millions of Americans.
If you have a long-term investment outlook, the answer is “yes,” it is time to consider investing in the stock market. With the S&P 500 index down approximately 20% from its record highs, this is a good time to consider investing in stocks.
When I point this out, clients ask the obvious question: Couldn’t stock prices fall even more?
And the answer is, of course they can. But no one knows when the market will reach the bottom. In effect, no one can time the market. While stocks dropped over 30% at the outset of the COVID-19 pandemic, virtually no one predicted they would bounce back within a few months and set all-time records for the rest of 2020 and 2021.
The stock market has a good track record of providing positive returns over multiple years and decades, and some of the biggest up days happen during a bear market. If you have the cash reserves to cover your short-term needs, investing now for the long-haul will likely pay off down the road.
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