Finance Globe

U.S. financial and economic topics from several finance writers.
7 minutes reading time (1452 words)

A Good Time to Invest

The recent volatility in the stock market has given investors a scary ride; there's no doubt about that. But does it provide investors with an opportunity to get in on some stocks at cheap prices, so they can sell at a higher price later? That's the basic rule of investing; buy low and sell high. The thing is, you never know just when those stock prices will actually hit their bottom. It's possible that you buy a stock at what you believe to be a rock-bottom price, and then it becomes apparent that the stock wasn't quite at its bottom when you watch the value of your holdings dwindle. Or, you could wait so long for the bottom, until the stock price price shoots up before you have a chance to react, completely missing the window of opportunity.

Market timing is very difficult to do successfully, or we'd all be rich. The stock market isn't predictable; that's why many investors jump into the market right at the peak of a bull run, just before the nosedive. They invest in stocks at inflated prices, thinking the good times will never end. Then, before they know what hit them, it all comes crashing down. What do you do at that point? Cash out before your investments suffer more loss? Hold on tight, in hopes of a rebound? Even expert market analysts can't provide consistently accurate advice about the market's direction. Times like these can really test our nerves, our confidence, and our judgement.

Those who have invested in the market over just the past few years may not have understood why short-term investing is not recommended, that is, until just recently. It may pay off well during good times; the last bull run lasted from 2003 to 2007. Four years of record gains can make an investor forget that the stock market works in cycles; what goes up must come down. Investors who purchased shares at their high may be disappointed in their investment choices and wonder if investing is right for them at all. You might look at the current value of your holdings and wish you sold when many stocks were at their high in October 2007. Hindsight is 20/20, but you can never predict the market's direction until it happens.

We know we can't predict the future. But many investors attempt to do just that by attempting to time the market. They think they know what will happen next, and some of them actually guess well, often enough to convince them self that they can, indeed, see into the future. Think about it, if a hundred people guess when they think the market will bottom out, then some of them are bound to get it right. Flip a coin and call heads or tails. You are likely to get it right half of the time. The other half you'll call it wrong. Are you willing to put your money on a fifty-fifty chance based on a guess?

So, on the same note, are you willing to guess that the market has bottomed out? Is this the right time to invest? Well, that depends. But it really doesn't have much to do with the current market conditions. It really depends on the conditions in your life and your current financial situation. Can you afford to tie your money up in investments that may continue to decline for some time? Never invest more than you can do without for at least five years. If you're hoping to get in on the cheap and make a profit in the near future, it's a coin toss. Hopefully you guess right, but you won't know until it happens. That's why it's so important to invest for the long-term.

Rather than waiting for the "right time" to invest, financial advisers recommend that you invest regularly, no matter what the market is doing. The stock market has historically returned gains of 10-12% over the long term. That's after averaging out the years of 30% gains and 20% losses, staying fully invested the entire time. But that 10-12% doesn't reflect the actual gains of most investors, because many of them don't stay fully invested through thick and thin. Their emotions take over, clouding their judgement. It's natural to get a little greedy when you see stocks gaining at a record pace, and also to feel fear when the stocks come tumbling. These emotions are what cause many investors to do the opposite of profitable investing; they buy high out of greed and sell low out of fear.

It's extremely nerve-wracking and rarely profitable to let your financial decisions be ruled by your emotions. What will happen tomorrow? What about next month? Next year? None of us know. So why bother worrying about what direction the market is headed in the short-term? Speculation is risky, and investing is already risky enough without throwing more uncertainty into the equation. Though past performance is no guarantee of future returns, it's all we have to work with. All we can do is look to the past for reassurance that the stock market has always rebounded and reached new highs after a crash, even though we have no way of knowing when it will do that.

The way to avoid emotional investing is to have a game plan, and stick to it. Invest a regular amount every month or every quarter, no matter what the market is doing. If you can set up an automatic investment through your broker or mutual fund family for a specific date every month, you can be sure that your investments won't be ruled by your emotions. Your overall cost per share will average lower by investing the same amount every time over a long period; you will automatically buy more shares when the prices are lower, and less shares when the price is higher. This is known as dollar-cost averaging, and is an effective way to invest for long term needs, such as the kid's tuition, your retirement, and your dream home.

If you were to invest with a large lump sum amount all at once when stock prices are at their peak, it's possible you could see a considerable loss in a quick minute. Just the same, if you were lucky enough to buy at the stock's low, you could see a dramatic increase in price, and a hefty gain when the market turns around. But since effectively and accurately timing the market is not realistically possible on a consistent basis, regularly investing a set amount, no matter what the market is doing, will help smooth out the extremes and provide a more predictable return over the long haul.

If you'd like to benefit with the use of regular investments, but allow yourself the freedom to attempt a little market timing, you can try a combination of the two. When you believe stock prices are low you can add to the amount of your regular investment and increase the number of shares at a reduced price. Before investing in an individual stock whose price is declining, know whether prices are low due to the market in general, or due to flaws in the company you've invested in.

When you invest this way for your long range goals, the extremes tend to balance out, and investments generally grow at a fairly predictable rate. When you get closer to your financial goal, consider moving your investments to safer vehicles that preserve capital, to avoid the risk of value fluctuation.

So, is it a good time to get into the market? It's always a good time to get into the market, if you are investing for the long term. The best time to invest is when you have the money. Some company's stock may have been pummeled by market conditions, and can provide the investor with value-priced stock of a strong company. No matter what the market is doing, it's always important to be sure your investment is a sound one, and not just riding the wave of a strong economy or suffering from a bad market. A strong, solid company may suffer in a declining market, but it will normally recover when the economy does. A weak company may be brought down by a declining market and never rise again.

There are many good stocks and stock funds out there, and there are opportunities in any market, bear or bull. Research and choose your investment carefully, and check up on it monthly or so. Use your financial goal calculator - not your emotions - to achieve your dreams. The stock market is very volatile right now, but you can find a rewarding investment with thorough research, planning, and patience.
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Monday, 18 November 2019

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