Over the past few months, I have received numerous messages from people wondering if this is a good time to buy stocks. Some asked if they should sell everything for a variety of reasons, from the stock market hitting record highs to inflation and the end of COVID. For those looking to capitalize on the magic of compound interest to reach their financial goals faster and easier, this conversation about when to invest raises the question, “Is there a better time to buy stocks?” In other words, “Is now a good time to invest?” The answer will likely depend on when you will need the money and how you plan to use it. Likewise, investing is different from speculation in Meme or Bitcoin stocks.
Most of the people reading this post will invest a little bit of money each month (or each paycheck), so they may have unknowingly made the decision to always buy stocks. To be clear, when I say “stocks,” I mean stocks of stocks, as well as investment vehicles like exchange-traded funds (ETFs), mutual funds, retirement accounts, and whatever else you invest in.
For clarity, this conversation may be different if you have stock compensation or highly concentrated stock positions. If you are like many of my clients and have several million dollars in company stock (stock options, RSU, etc.), there are likely reasons to sell these shares over time. From there, you will likely want to reinvest those funds in a more diversified portfolio.
Can the Stock Market Still Help You Build Wealth?
For those looking to build wealth throughout their life, different starting points can lead to better returns, especially in the short term. That said, the more time you’ve invested in the stock market, the better your chances of creating true life-changing wealth. If you put money aside every month and invested those funds in a diversified portfolio throughout your career, you would have had a hard time not benefiting from stellar returns on your investments in the stock markets over the past 10, 20, 30, 40. and 40 years. even 50 years.
If you invested just $ 100, per month, for 50 years (assuming a 10% return), you would have almost $ 1.4 million. What would you have to do to save just $ 100 per month?
COVID has thrown many people’s finances into chaos. It can be tempting to stop saving or just hoard cash in the bank. We know that people have been storing hand sanitizer, masks, and most famously, toilet paper. At the beginning of the pandemic, we saw a dramatic drop in the stock prices of some of the most beloved companies. Of course, that meant that shareholders in those stocks saw their account balances fall below their peak levels. That turned out to be the shortest bear market in history, and those who stayed (in their investments) reaped the rewards when the stock market hit record highs.
An easy way to start investing as the COVID-19 pandemic in the US progresses.
For those of you who are starting to get serious about investing, you might start by contributing to your employer’s 401 (k). Set up an automatic contribution of your paychecks to a diversified portfolio and forget about it. Ok, don’t forget completely and try to increase your contributions every year and every time you get a raise. You’ll get a tax deduction on your contributions, and you can even get free money in the form of matching or profit-sharing contributions from the employer.
Are we heading for a stock market correction?
Stock market corrections are scary when they occur, but they are actually a great opportunity for the savvy investor when they occur. We normally see a stock market correction once a year, while a bear market is rarer, occurring every 4-5 years, on average. Pessimistically, each day we are one step closer to the next correction or bear market. Hopefully, we are one step closer to the next big buying opportunity. Don’t waste a lot of time stressing over when the next bear market or recession is looming.
Should you move to safer investments?
You may have been tempted to fully bail out your investments when something unexpected happened, like the coronavirus. Research has shown that losing is more painful than winning. Vanguard gave some excellent examples of what happens when investors stick to their financial plans or abandon their balanced investment portfolios. He shared three examples of investors and their stocks during one of the worst bear markets in history, the financial crisis of 2008-2009.
All three investors had $ 1 million in their accounts in October 2007.
Inverter 1– Let’s call her Amy. He worked with an amazing financial planner and he stuck to his financial plan. He got all his money back in mid-2010.
Based on that example, Amy ended 2017 with around $ 1.9 million, using a portfolio of 50% stocks and 50% bonds. By simply staying the course and riding the financial crisis, Amy nearly doubled her money.
I’m sure no one reading this would be afraid to turn $ 1 million into $ 1.9 million. Of course, the journey was probably quite volatile and terrifying.
Inverter 2– We’ll call him Tony. He just couldn’t bear to see the value of his accounts fluctuate every day. He longed for the days when he could earn 7% interest on certificates of deposit (CDs) at his local bank. He discovered that the bad days were too much to bear. Eventually, he sold all of his shares and moved to what he saw worked best during the crisis. He ended up with a 100% bond portfolio. The alleged security of the bonds came at a considerable cost. It took around eight years for his account to come back into balance. He sold low stocks and bought high bonds.
By Vanguard’s example, Tony even ended up with $ 1 million at the end of 2017. It’s not the end of the world, but Tony wasn’t rewarded for his hard work saving and investing his money.
Inverter 3– Donald. He wanted to make the smartest financial decisions, so he got everything out of his investments. He bent down and put all his money in a bank account, earning interest. With interest rates at record lows for most of the past decade, Donald never got back the money he lost. To add a little more salt to his wound, the interest he was earning at the bank did not keep up with inflation and his purchasing power continued to erode over time. Did I mention that the interest in the bank will be taxed as regular income?
Donald was the worst of the three investors. After selling in a bear market and going to cash, it was just $ 729,214 at the end of 2017, according to the Vanguard study. He ended up with just 38% of the account’s value as investor one, Amy, who was left with his 50/50 portfolio.
There is a risk in using so-called “safer” investments. It can lower your chances of fully financing a secure retirement or achieving financial freedom or other important financial goals. Most people, with all their cash, will likely see their chances of running out of money in retirement increase. It’s nearly impossible to save enough money and generate enough income to fund a comfortable retirement using just Social Security and bank account interest.
Should you exit the stock market until it crashes?
Every time there is a big headline about the stock market hitting all-time highs, people ask me about exiting the market until it crashes. They are basically asking if they can get help timing the market. I think this is a fool’s trip. It must be at the time of selling and at the time of buying. Those in higher tax brackets will likely be hit by tax bills when buying and selling. You could lose more money in taxes than you would in an average stock market correction.
According to Franklin Templeton Investments, looking from the sidelines can cost you. During the 20-year period ending December 31, 2019, if you remained fully invested during that time period in the S&P 500 Index (ignoring any taxes, fees, or trading costs), you would have earned 6.06% per year. If you missed only the top ten days, your return dropped to 2.44% per year. It gets worse from there. With only the top 20 days left, their returns were only 0.08% per year. While he missed the top 30 days, his average return plummeted to negative 1.95% per year. Those who were in and out a lot, missing the best 40 days, lowered their average returns to a negative 3.82% per year.
Hypothetically, let’s translate the loss of the best day in the stock market into real numbers.
Suppose two people invested in a 100% S&P 500 portfolio during that 20-year period. Each person had $ 1 million to invest.
Investor One only bought one fund from the S&P index and left it alone. This individual would have ended up with around $ 3,870,000.
Investor two got stressed and went in and out of the S&P 500. This person would have ended up with a negative return of 3.82% and $ 458,700. Trying to time the market not only cost this investor more than half the initial investment, it also caused this person to lose more than $ 3.4 million in growth. WOOF!
You don’t have to do it alone. Working with a fiduciary financial planner who only pays, at the very least, can help make all of these financial issues less stressful. Having a well thought out roadmap to reach all of your financial goals will likely help you get there faster and easier. If you don’t know where you are going, how will you know when you have arrived? Once this coronavirus pandemic has passed, get out there and enjoy life. Your investments should be fine without you looking at them 20 times a day.