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Thanks to record-high inflation, geopolitical instability and the first interest rate hike in years, the current market is, simply put, incredibly volatile. Existing investors are making strategic changes to their portfolios and new investors are unsure if they want to be in. But is now the right time to start for those lucky enough to have some money at their disposal?
Here are three reasons — slow down.
1. Time in the market is better than market timing
general, when Once you start investing, it’s not as influential how long one invests. A long enough period, a well-diversified portfolio, and the power of compounding will usually smooth out portfolio volatility. This has been proven repeatedly historically as it relates to the stock market.
In contrast, “timing the market” or waiting for stocks to reach new lows or fall from recent highs so that investors can pick up bargains is risky. am. Short-term market movements tend to be unpredictable, and current trends can reverse in an instant. Waiting for the “perfect” moment to invest can mean missing out on potential gains.
In other words, for many traders waiting, now is a great time to invest as the market is falling. However, there may be exceptions for those in need of quick money, as a short-term recession can wipe out a portfolio overnight. If you are a new investor looking for a long-term “buy and hold” strategy, this is one of the best times to enter the market and start investing.
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2. The recession leaves room for growth
Many investors view short-term volatility as a risk that could adversely affect their portfolios. In the short term, this is true. Volatility often reduces the total value of an investment.
That said, one of the main ways the stock market generates returns is when investors buy low and sell high. And what better way to profit from big price differentials than to buy when the market is down? Forget market timing. A great strategy for long-term growth is to buy when the market is down.
It may be helpful to view market volatility as a form of bargain hunting. By buying high-quality investments when they are “on sale,” investors can increase future profit margins when the market recovers. The trick is to sort the junk out of the gems.
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3. Markets will work sooner or later
There is no guarantee that individual securities will be profitable. But historically, given enough time and increased economic activity, the stock market has always performed — eventually.
That said, crash-to-recovery times vary widely and are unpredictable. As such, it is nearly impossible to determine how long an investor will have to wait to realize a profit.
For example, after the Great Depression, most stocks took 12 years to recover. However, many stocks recovered in just four months during the COVID-19 pandemic. This is a reminder that there is no way to time bull or bear market cycles and that market recovery can occur even in the worst economic conditions.
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Start slow, establish good habits, and “feel” the market
So is now the right time to invest? For investors who aren’t in danger of retirement, the answer may be yes. All investors should consider their risk tolerance and time horizon before deciding when and where to invest. Starting slow makes it easier for new investors to enter the market without introducing undue risk.
Beginners can simply start with dollar cost averaging. This involves investing small amounts on a regular basis to smooth out market ups and downs. While not as exciting as day trading, dollar cost averaging reduces the temptation to time the market and may even lead to greater profits for investors.
The current market may look intimidating, but competent investing is about the future, not day-to-day trends. Strategize, stay focused, and take risks only as much as you can without touching the future.
