Americans aren’t feeling very confident about the state of the stock market. In fact, according to a report from Allianz for Life conducted at the end of May, around 54% of respondents feared the market hadn’t yet hit bottom.
Despite this dire outlook, however, there was some good news — 42% still believe that right now is a good time to invest. And the reality is, those survey respondents who think investing right now is smart are right, even if the market hasn’t bottomed out. Here’s why.
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When you’re investing for the long term, a downturn presents an opportunity — if you don’t waste it
If you think the market may go down over the next few months, you may be tempted to hold off a bit and get your money invested once it hits rock bottom. After all, market crashes present buying opportunities, so theoretically it makes sense to wait until a big crash happens and buy when share prices are as low as possible.
The problem, of course, is that no one can predict exactly when a rally will start. And investors are notoriously bad at doing so because the natural tendency when the news is bad is to assume things will get worse. You may not be able to spot the subtle signs things are improving until the market is already rallying. And if you happen to mistime your investments as you wait for stocks to decline further, you could find yourself losing out on key opportunities you have today for phantom ones you hope will come your way in the future.
Rather than getting stuck sitting on the sidelines as the market goes up because you thought you could time your entry perfectly, you’re far better off focusing on finding the right companies and buying as much as you can afford at any given time.
If you’re doing that, it doesn’t matter if you buy stock and the price falls a bit, since you haven’t actually lost anything unless you’ve sold your shares. If you’ve invested in a strong company, the stock price should recover from a temporary decline in a bear market and you should do well over time. And, of course, your investments may not even go down, as many companies still perform well when the market as a whole falls.
The key thing to remember is that history shows that the stock market produces a 7% average annual return over time, and no other investments that present a reasonable level of risk can come close to that. If you make the average returns in the long term, or do even better and beat the market, will you really care in 10 years that the stocks you bought went up and down a bit over the decade, or will you just be happy with your total profits?
Of course, since stocks can always go down temporarily, not just right now but at any time, you do need to make sure you’re only investing with dollars that you can keep in the market for at least five years. And you need to make sure you’re buying a diverse array of index funds that give you broad exposure to the market or purchasing companies with a strong competitive advantage, a sound leadership team, and the potential to weather the storm and come out stronger.
It’s far better to spend your time doing the work needed to find those investments than to worry about when the market will hit rock bottom.
Get your money in the market even if it could still go down
Since coronavirus has caused a recession, there’s a very good chance the majority of Americans who think the market will go down are absolutely correct.
But if you’re making sound investment choices and buying stocks you want to hold through good times and bad, you shouldn’t worry if there’s a bear market for a while. Do your research and get your money in the market today so it can start working for you. Over time, it’s the single best way to earn the returns you need for financial success.