Historically, the stock market has tended to trend upward in the long term. But during times of short-term volatility, it's natural to wonder whether it's a good time to buy or to hold off until things improve.
Unfortunately, it's impossible to predict what will happen with stocks and other financial securities. But there are some steps you can take to build a diversified portfolio and mitigate some of the short-term risks you may be facing. Here's what you need to know.
In short, it's virtually always a good time to invest if you have a long-term investment horizon. That said, it's natural to be concerned about recent fluctuations in the S&P 500 and other market indexes, and wonder whether now is a good time to buy stocks or other securities.
But timing the market is rarely a good investment strategy, and there are other ways to work toward your objectives while mitigating risks in your portfolio.
Market timing involves trying to guess which direction the stock market or individual stocks will take. Some investors perform complex analyses and track the latest breaking news to try and maximize their profits on short-term price fluctuations.
But it's impossible to know — both accurately and consistently — when a security, sector or market has reached a point where you should sell or buy.
As a result, it's typically better to focus on time in the market rather than timing the market. This means accepting that market timing is a futile (and risky) endeavor. Instead, adding to your portfolio consistently can be one of the best ways to maximize your long-term investment goals.
Whether you're a beginner or a seasoned investor, there are several reasons to start investing or to keep building your portfolio:
You can take advantage of the compounding factor. The longer you're in the market, the more gains you can earn in the long run, even despite years when returns are lower than average. That's because gains compound over time, even if your contributions aren't big. Try our compound interest calculator to see for yourself!
The stock market historically trends upward. Short-term volatility is part of the nature of the stock market. But on the whole, the market has trended upward, which is good news for long-term investors.
Work towards a healthy retirement fund. If you wait too long to get started with investing, you may have a hard time amassing enough wealth to retire when you want. The sooner you get started, the easier your retirement planning will be.
You'll have a better chance of beating inflation. Savings accounts, money market accounts, and certificates of deposit can be great for short-term savings needs because they provide safety. But they generally don't offer high enough returns to outpace inflation. If you want both your money and spending power to grow, investing can help you do that in the long run.
Some accounts offer tax benefits. With some retirement accounts, you can take advantage of tax benefits both now and in retirement. Deducting retirement contributions in the current year can provide some relief and even increase your tax refund.
You can't control the market, but you can control the approach you take to your investment portfolio. Here are some investment strategies that can help you along the way.
Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of how well the stock or fund you're buying is performing.
This strategy makes it easier for you to establish a consistent habit of investing. It can also help smooth out some of the effects a fluctuating market can have on your investment. While your average cost per share will be higher when prices are high, it will go down as prices decline.
Passive investing can be a great way to diversify your portfolio at a relatively low cost. And if changes are made to the underlying index, your fund will make those same changes without requiring you to do anything.
Passive investing can also help by removing emotions from your investment strategy, helping you avoid making rash decisions that could negatively impact your returns.
Also known as the buy-and-hold approach, long-term investing starts with buying stocks, funds, and other securities. Then you'll hold onto those investments for a long time — it can be several years or even decades for longer time horizons, such as retirement. This approach doesn't require a lot of ongoing effort, and it allows you to enjoy the potential upward movement of the market.
Regardless of how you decide to approach your investment strategy, here are some investing tips to help you develop an efficient portfolio.
Diversification is one way to reduce risk. When you put all of your money into a single stock or stock sector, such as technology, that strategy could leave you exposed to risks that only that company or sector experiences. Diversifying your portfolio, by spreading your investments across stocks, bonds, real estate, and other asset classes, can help you mitigate some of the risks inherent with each individual type of asset.
One of the best ways to diversify your portfolio is through mutual funds and ETFs.
Your risk tolerance is the degree of risk you're willing to take when it comes to volatility in the market. If you're investing for a retirement that's decades away, for instance, you may have a higher risk tolerance than someone who's planning to leave the workforce in just a few years.
Take some time to consider your time horizon and your willingness to stomach declines in the market. These factors can help you determine how to best allocate the assets in your portfolio. While stocks are generally favored by investors with long investment time frames and high risk tolerances, you may consider adding bonds to your portfolio if your tolerance is lower.
Again, it's impossible to predict how the market will act over time, but you can still set realistic investment goals. Think about what you want to accomplish with your investment portfolio, then consider what it takes to get there.
With retirement planning, for instance, you can use an online retirement savings calculator to enter assumptions about when you want to retire and how much income you want to receive. Once you plug in the details, you'll get an idea of how much you'll need to save to achieve that goal. If your goals are too lofty, you may need to make some adjustments, such as saving more or changing your estimates.
You may also consider enlisting the help of a financial advisor who can provide you with personalized investment advice and guidance throughout the process.
Consider your investment goals, risk tolerance, timeframe, and portfolio makeup to determine what you should invest in. However, if you're unsure about what to do or you're relatively new to investing, ETFs are a great place to start.
With Acorns Invest, you get access to exchange-traded funds that contain a diversified mix of stocks and bonds. The investments are based on your age, time horizon, income, goals, and risk tolerance. You can also set up automatic contributions to your Acorns account.
If you have a good amount invested in a diversified portfolio, you may also consider investing in individual stocks and other types of securities. However, try to avoid putting too many eggs in one proverbial basket to avoid taking on too much risk with your portfolio.
Take a look at your budget to determine how much you can reasonably invest while also covering your necessary expenses and working toward other important financial goals.
Regardless of your situation, any amount of money is a good amount to get started. Remember, building a habit of investing is often the most important way to accomplish your goals.
If you don't have a lot to invest, you can get started with Acorns with just $5. You can also take advantage of Round-Ups® investments, which are made up of spare change set aside from every purchase you make with a linked debit card.
This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.
Dollar Cost Averaging does not ensure a profit or protect against losses. It involves continuous investing regardless of fluctuating price levels.
Acorns Invest is an individual investment account which invests in a portfolio of ETFs (exchange traded funds) recommended to clients based on their investor profile.