Is now a good to invest? 5 Things to Consider
Many investors who are just getting started are wondering is now a good time to invest. Even some seasoned investors are wondering if they should continue investing! With everything at or near all time highs maybe I should wait? Maybe I should pause my investing plan? Should I still open a brokerage account and buy Tesla, Zoom or Apple? These are all good questions and with good reason because we are advised to buy low and sell high; yet these are all at all time highs. Maybe we should sit tight on the sidelines and wait for a better entry point.
With all this in mind let’s look at 5 things to consider and then come to a conclusion at the end if we should start or continue to invest if we are a seasoned investor.
There Are Always Great Reasons Not to Invest
I’ve been investing in the markets since the fall of 2003 when I started my career and I had some money to invest. Even back then, in the shadow of the dot com bubble bursting and 9/11, people were asking if it was a good time to invest. We need to realize that with very few exceptions, there will always be solid reasons not to be investing — right now is no different. Let’s take a look at the last couple reasons.
2021 – Current Reason Not to Invest:
Stocks are at all time highs, valuations are extremely expensive which means investors are paying very high premiums for stocks which could indicate subpar future returns. This sounds like a bad time to be investing. Bond yields are near negative so there is little yield or return, gold is facing pressure because its being sold off to buy cryptocurrencies. Bitcoin and Ethereum are are all time highs and their rise to such prices has been very fast in a very short timeframe. How much room or upside can be left? We are still facing the effects of the COVID-19 pandemic and there is a chance a new variant could push back our recovery and some businesses might never return. How can we keep pushing higher when the fundamentals seem weak and could get weaker?
Prediction: Things are looking promising with the vaccine rolling out and governments willing to do anything to stimulate their economies. I would invest in anything but cash denominated investments such as cash, bonds, or CD’s.
We will find out over the next 12-24 months how things unfold and hopefully this article can give you some insights or things to consider for your investing this year.
2020 – COVID Crash – Previous Reason Not to Invest:
In February, March, and April of 2020 and even through the summer months there were countless reasons to be selling off stocks and getting out. Even some of the best investors like Warren Buffett were selling bank, airline and oil stocks. Recall in April oil futures went negative! We were in the grips of a pandemic and widespread lockdowns and nobody knew what was going to happen.
“You make most of your money in a bear market, you just don’t realize it at the time.”
~Shelby Cullom Davis
The Result: March and April were terrific months to be plowing all of your money into stocks if you had any on the side. If you had the foresight to buy Bitcoin when it was priced below 5,000 and hold on through December you would have made 6X your money when it passed $29,000. Terrific amounts of money were made by those who had the stones to step into the markets when everyone was fearful.
All Previous Reasons Have Something in Common
If you review all previous reasons to not be investing into the markets they all have one thing in common. Because we are at an all-time high right now, that means all previous entry points in the market were lower than today. Speaking from a broad index point of view. So the answer to all previous concerns is that they were all good times to be investing or getting started. However, it is true that for those long term investors, who invest into broad indexes like the S&P 500, they are all up and enjoying positive returns as of today.
Nobody Knows Where the Market Will Go Next
Is now a good time to invest? Well there are two types of market predictions. There are those that are clearly wrong and those that are lucky! As we see more often than not, the vast majority of predictions are flat out wrong. Why is this? It’s because in the end nobody knows where the market will go next. We have no idea the direction, magnitude or the duration of the next move. Yes, I understand the irony of giving your my prediction or outlook for 2021 in the previous section!
Bad Prediction
Recall during the summer months of 2020 the pundits were all talking about how the market recovery was over extending or happening too quickly. That the market needed to correct and pull back. In essence they were saying that it was definitely not the time to be investing in the stock market. We know now, they were flat out wrong. All along the recovery phase were excellent points to be entering the market.
The Lucky Ones
The ones that get the market right or their predictions correct are more often lucky than full scale correct. There are just too many variables to take into account. More often than not they are just lucky!
I don’t believe anybody knows what the market is going to do tomorrow, next week, next month, next year.
~Warren Buffett
Dollar Cost Average Can Help “Time” Your Investment
One of the best ways to enter the market is through Dollar Cost Averaging. This is a very simple yet effective investment technique used by many long term investors. So the quick answer to the question, is now a good time to invest in the stock market? Is to enter the market with non-leveraged money that we’ve earned and saved through budgeting and put it to work using the dollar cost averaging method.
What is Dollar Cost Averaging?
Dollar cost averaging is when you buy a set amount of an asset, say an Index ETF, over a set period of time. For example, you contribute $50 every pay period into the S&P 500. See the example below which I pulled from Investopedia.com:
When to use it
We should be using this technique all the time. This helps to make sure we are investing at the best time: every time we have excess money. This takes advantage of our budgeting practices and also with our practice of paying ourselves first.
Dollar cost averaging also helps smooth out a risky or speculative asset. The more risky the asset the longer your dollar cost average period should be so you can grab more potential downside pricing. This can provide a terrific time to enter the market by spreading out your entry over time.
Dollar Cost Averaging Diversifies Your Timing Risk
When you use dollar cost averaging you are diversifying your timing risk. It ensures that while you will not get in at the lowest price, you will also not get stuck with the highest price either.
Compounding Returns Requires Time in the Market
The best time to be investing in the market is all the time. We should be invested and letting our capital compound and grow into something truly substantial. I know there are times when this is easy, and there are times when this is excruciatingly difficult. Consider that the bulk of your returns and biggest leaps in absolute net worth will come later in life.
Again looking at our Wealthy Friend Warren Buffett we can see the bulk of his fortune has happened later in life, not early. This is the result of compounding returns. There is no way around it, it requires time!
Time in the Market vs. Timing the Market
The question, is now a good time to invest in the stock market or in cryptocurrencies is best answered if you can first answer how long you can invest your capital. Because in the end your nest egg, investment portfolio, or total net worth is highly correlated to the time you have your investments working for you. The principles of compounding and dollar cost averaging both rely on having lots of time in the market to grow.
Time in the market beats timing the market – almost always.
~Ken Fisher
30 Year Investment Time Horizon
Show me someone who is rich – really really rich and wealthy, and I’ll show you someone who has been investing and growing their wealth for 20 or 30 years. Of course, assuming they started from nothing and didn’t have a large inheritance or family business to take over. They will have invested through tops and bottoms, good times and bad times. Their ability to stay the course has been a key contributor to their success. I often ask them them is now a good time to invest? They often reply with an enthusiastic YES! get investing, stay investing and get wealthy!
One of the best pieces of advice I could impart to any investor is for them to pick something they know they could invest in and do for 30 years. In many ways your ability to continually invest into something for 30 years will do more for your wealth than any other thing. Picking to invest in stocks, real estate, gold, or bonds will matter less than your ability to stick to and stay the course over 20 or 30 years. Constantly switching and swapping assets for another is performance chasing and this leads to underperformance.
Conclusion
There will always be reasons not to invest
Nobody Knows Where the Market Will Go Next
Dollar Cost Average Can Help “Time” Your Investment
Compounding Returns Requires Time in the Market
Time in the Market beats Timing the Market
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