As a new investor it can be tempting to wait a good time to invest. Is now a good time to invest? You might be hoping for a drop in prices before you invest. New investors often look for the perfect opportunity to start investing. Some want to buy in at the optimal price other want an anxiety-free investment strategy. Most new investors don’t want to lose money so buying it at the right time feels crucial.
So what can you do to make sure that you don’t invest at completely the wrong time? When is a good time to invest in the stock market? The truth is that optimal conditions don’t exist or matter and you shouldn’t rely on them anyway. You should embrace terrible market conditions if you are investing for the long-term.
Whilst timing the market can have a short-term impact. Be this positive or negative, in the long-term it will work itself out. The fundamental difference in returns will come from how you behave as an investor over time.
There Will Never Be A Good Time To Invest
There will never be a good time to invest. You will catch the market in two different states.
- One when the market has reached an all-time-high and “must be about to crash”.
- When the market is crashing and will continue to do so.
Currently it’s the former. Beginner investors are full of existential dread right now. The stock market seems to be collapsing due to global geopolitical events which are spiralling out of control. Investors have had it easy in recent years and the testing times have now arrived.
I have already started to hear stories about people cashing out their stocks and moving to cash. These are people who work in the investment and finance space! The fact that ‘professionals’ are selling-off their stock positions, makes you think they know something you don’t.
As a beginner investor you need to clarify what your investment goals are in the first place. Every investor has their own objectives and unique financial circumstances. Often, you’re investing with the hopes of meeting specific financial goals.
Please Note: This is not financial advice and you are responsible for your own investment decisions. When investing capital is at risk.
Andrew | Mr Money Side Up
Now Is A Challenging Time To Invest
I won’t lie to you. I would worry about losing money in the stock market in the current investing climate. The stock market may continue to fall as investors sell-off their investments. There are a multitude of factors influencing stocks right now. It is a confusing time for investors. There are warnings that we are in an asset superbubble. At the same time, stocks keep crashing. This is because of inflationary pressures, interest rate hikes and the cost of the war in Ukraine.
As a result investors are not sure how to hedge against inflation and where to invest. It seems there may be no room to hide. You can’t stay in cash because of high inflation. Equities might not beat inflation because they might crash. Traditional safe-havens such a fixed-rate bonds become less attractive as interest rates increase.
In fact, there are three economic scenarios that may result from monetary policy (e.g. interest rate changes).
- Interest rates remain low and the supply chain issues soften – inflation decreases over time.
- There are rates hikes – the economy contracts, inflation continues to rise and we have stagflation.
- There are interest rate hikes – the economy contracts and inflation reduces.
The second economy scenario will be strongly influencing interest rate decisions. Policy makers such as the Bank Of England and Federal Reserve have not started with bold rate hikes. Instead they are using back to back increments to be able to predict and avoid Stagflation. As investors, we must assume that growing inflation and interest rate rises will be a consistent feature.
Is This The New Normal Or Has This Always Been Normal?
The silver lining is that you don’t need a good time to invest. You can earn decent stock market returns, even when market conditions are terrible. That’s if history is anything to go by. In the last century there has been:
- World War 1 (1914 – 1918)
- Economic Depression (1929 – 1939)
- World War 2 (1939 to 1945)
- 1970s Energy Crisis (1973, 1979)
- UK Secondary banking crisis (1973–1975)
- Black Monday (1987)
- The Dot.Com Crash (2000)
- Hurricane Katria (2005)
- 2008/09 Financial Crisis
- Brexit 2015 – Present
- Covid-19 2021 to Present
Despite all of these events the average 10 year stock market return has been 9.2% on average over the last 140 years.You might also be surprised to hear that despite all the economic, social and healthcare issues related to Covid-19 the US stock market grew by 16.26% in 2020 and 18.70% in 2021.
Between 2010 and 2020 the S&P 500 has done slightly better than the 10-year-average increased to 13.6%. According to the law of averages, the S&P 500 is due a correction; which could be what we are seeing now.
The Next Financial Crash Is Always Around The Corner
The stock market declines and occasional bubbles are part of life, just like the occasional thunderstorm or very severe winter. There were 37 corrections between 1980 and 2018, meaning that stock prices will have an intra year decline of at least 10% on almost a yearly basis. Declines of 20% or more are less common, occurring just 14 times since 1942. As a result there is simply no point trying to avoid them, you just have to accept them. Perhaps even embrace them!
In fact, if you are in the wealth accumulation (rather than preservation) stage of your investment journey, then stock market dips and crashes can actually be pretty beneficial. This is because you are essentially buying stocks when they are ‘on sale’.
If you had been shopping around for a new phone or laptop and then there was a 50% sale, would you shriek and run away? No, you would gladly take the hundreds of pounds in savings!
So Why Isn’t It Better To Wait For A Stock Market Sale?
Waiting for prices to fall almost never works and what do you do once you’re invested? The graph below gives you an indication of just how difficult it would be to time the market or jump in and out. Just look how closely the best and worst days are to each other! You can actually see that they are pretty clustered together; one day it’s the worst day on record and the next day it’s one of the best.
You can read about why trying to time to market is futile by clicking here.
It’s also exceedingly difficult to predict the upturn following a stock market crash. Just in the first quarter of 2020 US GDP fell by 5% from the previous quarter, at the height of the 2008 recession, the peak was –8.4%. In terms of annualised growth the US GDP fell by over -30% from the previous year in Q2 and the UK’sby -19.5% in Q2 of 2020.
Given the steepness and scale of economic contraction, what would have predicted stocks would have grown or fallen by in the following year?
- -20%?
- -10%?
- -5%?
- +10%?
- +20%?
I would happily bet that you would never have said ‘up to 95% in the following year’. With the US and UK GDPs bouncing back in Q3 by 30% and 17% respectively. Therefore trying to judge when the bottom is or when the economic recovery will be is just pure folly.
Would You Ever Jump Off A Rollercoaster Every Dip?
Think of your investing journey like this. The stock market is like a rollercoaster; both can be scary. Usually there are a few little dips and jumps before a deep plunge. Although there are a couple of rides I can think of that pretty much starts with a deep drop and from there it’s not too bad.
There is a theme park ride I remember going on during a family holiday to Florida in the United States. It’s called SheiKra and it stands out in my memory! That’s because this rollercoaster drops by 200 feet up in the sky at 90 degree angle! Let’s consider a ride that has lots of twists, turns, and drops. Would you jump off the ride every time there was a dip? No you wouldn’t. That would be utter madness of course but people do this when it comes to investing, they get scared and bail out.
This is unfortunate. Like a rollercoaster, it’s all the twists, turns and dips that create the value. It’s the shock drops that create the opportunity for long-term investors.
Financial Crashes Are The Financial Equivalent of Forest Fires
These market crashes are part of the economic cycles or growth and recession. You can compare this aspect of the stock market to forest fires. Although these are now exacerbated by climate change they are a natural processes.
It might not seem like it at the time but they can actually be very good for the ecosystems. Forest fires release valuable nutrients and open the forest canopy to sunlight. This stimulates new growth. They also allow some tree species to reproduce and this encourages biodiversity.
The stock market is also an ecosystem. In the sense that during economic forest fires, the wheat is sorted from the chaff. Those with poor cash flow or too much debt or generally bad balance sheets collapse.
Overcrowded market environments are burned away. This creates fertile new conditions (i.e. cheap credit, reduced real estate costs) to take its place. This allows new businesses, market conditions and customer demand to grow. This means that bear markets and market crashes can be a good time to invest.
Online businesses were in the perfect situation during the Covid-19 lockdown. Brick and mortar establishments such as high street retailers closed up shop. They couldn’t adjust to the new conditions. This opened up market share businesses optimised for the digital space.
How To Balance Risk With Loss Aversion When You Invest
There are two options when it comes to investing. You can invest in lump sums or average out your investments. The evidence base is a little mixed. The historical data shows lump sum actually performs better than cost averaging.
When gong through a down period averaging out your investments can help to avoid losses. I would argue that it’s much more of a psychological challenge to invest a lump sum. It’s human nature to worry there is going to be a ‘SheiKra’ style drop to the bottom as soon as we invest.
You might consider storing some dry powder (metaphorical gunpowder to be clear!). This would be so that you can buy stocks when the prices drop. In my experience, it’s less stressful to invest on a regular basis over the long-term. Much more practical too, as you can automate your investment contributions.
Holding savings back for potential dips and crashes seems like a good idea in principle. In reality, it’s far more likely to sit in your savings account, eroded by inflation. It is important to note that maintaining savings is a healthy behaviour. You never know how a market downturn or recession will impact your circumstances.
How Not To Lose All Your Money In Stocks
Investors should select an investment strategy according to their financial goals and time-frame. The rest is all market psychology. Investors should recognise that there will always be economic cycles. These are cycles of expansion and contraction.
This means there will always be market crashes. From a starting point perspective there is never a good time to invest. This is because as some point you will experience a crash during your investing journey.
Instead of panic selling it is important to continue investing. I find it essential to automate my investments end-to-end. From my monthly contribution to the rebalancing and diversification of my assets. I also have a healthy way of thinking about my investment strategy:
When the market is up, I’m happy because my investments are growing. When the market is down, I’m happy because I’m buying assets cheaper. This means that the best time to invest is always now, if you look at it from a glass half full perspective.
How Not To Lose Money On Stocks
All of this considered, I find it’s easy to set-up an investment strategy that I am happy with and just keep feeding money into it. With this in mind, I invest into assets that are likely to provide positive long-term returns. Which is why I invest into a diverse investment portfolio which covers thousands of stocks and other assets.
In my mind, it’s better to have confidence in your investing strategy and then simply ignore all the chaos of the stock market. Therefore I look for a wealth manager that provides:
- Passive Investment Funds (e.g. Index Funds)
- Tailored approach to invested that suits my goals and tolerance to volatility
- Automated Investing for a consistent approach to investing
- Automatic rebalancing
- Reinvestment of my dividends.
Index Funds Vs Individual Stocks
At the core of my investment strategy is my investment in index funds. These track the overall performance of the stock market and contain hundreds if not thousands of stocks. That means when you invest into an index fund you buy shares in lots of companies.
Learn more about index funds by clicking here.
I use a Exchange-Traded Funds (ETFs) to invest into a bundle of index funds. This adds global diversity to the stocks a buy. Diversify is key because if one countries economy staggers like the Japanese economy did in the 90s then my investment portfolio remains robust. This is just one of the benefits of low cost online investing.
My favourite thing about index funds is that they are self-replenishing. This means that if one stock crashes it will fall out the index to be replaced by another stock. As a result, you don’t have the same risk exposure compared to buying individual stocks. You don’t have to know anything about the stocks you are buying.
- You can access the 8 Index Funds that make my shortlist by clicking here.
Trackbacks/Pingbacks