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You might think it’s a bad thing to invest when stock prices are up. Read on to see why it’s not. [[{“value”:”
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Money you might need for near-term goals or unplanned expenses should sit in a savings account. On the other hand, when you’re working toward a long-term goal, like retirement, it’s generally best to invest your money so it can potentially grow into a larger sum over time.
Now, you may have heard that when it comes to buying stocks, it’s best to add shares to your portfolio when their price is down and then aim to sell when their price is up — in other words, buy low and sell high.
It’s good advice in theory. But it’s also advice that’s really hard to follow. And trying to follow it might hurt you in the long run.
It’s not a good idea to time the market
The stock market, as measured by the S&P 500 index, is up about 9% year to date as of this writing. Because of this, you may be inclined to sit out the market for a while and wait for things to cool off.
Here’s the problem with that approach, though. We don’t know when or if things will cool off. Granted, it’s likely that at some point, stock values will drop to at least some degree from where they are today. But we don’t know when.
Also, there’s a good chance that years from now, the S&P 500’s value will be considerably higher than its current value. So by not investing today because the market is up, you might lose out on the chance to grow your money into a larger sum.
Over the past 50 years, the stock market has averaged an annual 10% return as measured by the S&P 500. Let’s say you sit out the market this year and wait for next year to put $30,000 you have on hand to work in a brokerage account. If that gives you 19 years until retirement, you’ll end up with about $183,500, assuming a 10% annual return in your portfolio.
But if you give yourself 20 years to earn a 10% return on your $30,000, you’ll be looking at almost $202,000. So all told, in this example, sitting out the market for a single year might cost you over $18,000.
Aim to invest on a steady schedule
Trying to time the market can mean losing out on the chance to make money on your money. So don’t worry about whether you’re investing when stock values are high versus low. Instead, remind yourself that stock values have a tendency to rise over long periods. So if you have a longer window to work with, the time to start investing is now.
What’s more, a good bet is to aim to invest a preset sum on a regular basis, whether by making monthly IRA or 401(k) contributions or by putting money into a taxable brokerage account. Remember, the value of your investments might fluctuate from one month to the next, or from one year to the next. But none of that truly matters in the long run.
What matters is the amount of money you end up with at the end of the day. And if you want to end up with more money than less, your best bet is to start investing as soon as you have the means to do so — regardless of where stock values sit.
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