The short answer is: yes. It’s smart to invest regularly for your future. So now is as good a time as any to invest.
It’s true that investors in the stock market have seen record volatility in recent weeks, as the coronavirus outbreak has spread around the world, grinding economic activity to a halt in many places and leaving broad uncertainty about the future. The stock market ended its record-long bull run and slipped into bear market territory in March 2020 for the first time in over a decade.
Is it a good time to invest when the market is down?
While no one can predict the future, historical evidence suggests that the market will recover. Throughout the entire history of the market, every downturn has ended in an upturn—and the market has gone on to set new highs.
Based on historical patterns, periods of downturn are just interruptions in the market’s overall growth. So even though it can be scary to watch the value of market holdings plummet, understanding the nature of the market means realizing that those prices are likely to eventually rise again. And investing while the market is down often means you can get a bargain.
Nobody can guess whether the market has hit its lowest point, but it’s already possible to buy stocks for much less than was possible a couple months ago. “I believe we are close to a low in stocks, but even if I’m wrong, many stocks are cheap now,” says Jimmy Lee, CEO of The Wealth Consulting Group in Las Vegas. “Every single time we have had a bear market, I wished I could get more investors to allocate into equities. This time is no different.”
How much should you invest?
The amount of money you invest depends on your financial situation and your financial goals. Many experts recommend saving or investing at least 10 percent to 15 percent of your income. If you don’t have a robust savings account, you may want to split up that amount between an investment account and a savings account that you could access in a financial emergency.
Aim to build an emergency savings fund that could cover your bills for three to six months. Once you have savings in place, you can focus on building your investments. Start with a retirement account such as a 401(k) or IRA, which offers tax advantages. Then consider a regular investment account for mid-term goals.
How often should you invest?
Lee recommends investing on a monthly basis. “Regular investing is a way to get a lower average share cost when buying stocks as they go down,” he said.
If you spend the same amount of money each month to purchase shares of stock—or if you purchase at regular intervals when the stock market is down—you are better able to neutralize the effects of market volatility. That’s because as the stock price goes up and down, the price you pay will vary at each periodic investment. This is known as dollar cost averaging, and it can help you avoid making the mistake of purchasing one lump-sum investment that is poorly timed and leads you to pay a price that is too high.
What should I consider when investing?
If you’re ready to invest in the market, keep in mind your personal financial goals and your timeline. Those goals might include retirement by a certain age or saving enough to pay for your child’s college education by the time he or she reaches age 18. Your goals and the amount of time you have to reach them will inform all your investment decisions.
You should also consider the following with each investment choice.
This is the amount of uncertainty that you are personally willing to handle regarding your investments. For instance, because of the stock market’s natural volatility, investing in stocks always involves risk. If you have a longer time frame for meeting your investment goals and a risk-taking personality, you may be comfortable with a majority of your investments in stocks.
However, if you have a shorter time frame—maybe you’re just a few years away from retirement, for example—you may have a lower risk tolerance. In that case, it would make sense to weight your portfolio more heavily toward fixed income investments like bonds and less toward stocks.
Building a diverse portfolio is also crucial for protecting your investments from volatility in one sector or region. For instance, if you hold all U.S.-based stocks and the U.S. market suffers a deep downturn, you could be missing out on gains in international stocks. Or if tech stocks are suffering, a portfolio with a diverse mix of stocks could weather the losses because it will also contain stocks in many other sectors.
One easy way to build diversity into your portfolio is to purchase mutual funds or exchange-traded funds (ETFs) that include holdings in a variety of companies and sectors. You can also look for funds that focus on certain geographic regions. (Acorns portfolios contain a mix of exchange-traded funds with exposure to thousands of stocks and bonds.)
Stocks vs. bonds
Investors who view investing in the market as a long-term strategy are usually more successful than those who view it as a short-term strategy. And over the long term, it’s ideal to build a balanced portfolio that includes different asset classes, including stocks and bonds.
But even as the market bounces through a correction, long-term investors can take a deep breath, exhale, and feel good about purchasing a bargain now. As history shows, every market downturn has always resulted in an upturn. Now might be the time to take advantage of that future growth.
Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.