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Just because stocks seem expensive doesn’t mean they truly are. See why it’s still a good time to start investing. [[{“value”:”
The S&P 500 index, which is widely regarded as the benchmark index that best represents the strength or weakness of the U.S. stock market, recently hit a fresh all-time high. Over the past year alone, the S&P 500 has been up by more than 35% thanks to stronger-than-expected economic conditions, strong corporate earnings, slowing inflation, and the expectation of lower interest rates.
If you don’t currently invest in an individual retirement account, or IRA, it might seem like a bad time to start. After all, the central goal of investing is to buy low and sell high. Isn’t investing when the stock market is at an all-time high literally the exact opposite?
The short answer is that despite the market’s strong performance, it’s still a great time to start investing with an IRA. Let’s take a closer look at why it’s generally been the wrong move to avoid the stock market when it seems expensive to get started.
Don’t have an IRA yet? Check out our updated list of the top IRA accounts to see which could be the best fit for you.
A smart strategy when stocks are “expensive”
Notice I’m using the word “expensive” in quotes. I won’t get too technical, but just because the stock market — or any individual stock — is trading for an all-time high doesn’t necessarily mean it’s expensive. For example, many people thought the S&P 500 was expensive in 2015 after several years of sharply rebounding from the financial crisis, only to watch the index rise by another 74% over the next five years.
The point is that if you think stocks are expensive right now, you might be right or you might be wrong. But trying to time the market is a losing battle.
With this in mind, the best way to invest through an IRA right now could be to use a strategy called dollar-cost averaging. The simple explanation is this means investing equal dollar amounts at specific intervals in your favorite stocks, ETFs, or mutual funds. As a basic example, instead of investing $6,000 at a set point in the year in a S&P 500 index fund, maybe invest $500 in the same index fund at the beginning of each month.
By doing this, you’re mathematically guaranteeing yourself a favorable average price. Since you’re investing the same amount of money every time, you’ll buy more shares of the index fund when prices are low and you’ll buy fewer shares when prices are higher.
The bottom line
The key takeaway is that it’s never a bad time to open an IRA and start investing, even if stocks seem expensive. For one thing, opening and contributing to an IRA through your chosen broker gets you valuable tax benefits. And second, regardless of how expensive stocks look, it’s never been a bad time to put money in the market from a long-term perspective.
New to investing altogether? Review our list of the best online stock brokers for beginners to find one with low fees and user-friendly features.
As an example, arguably the worst possible time to invest in the past two decades was at the market’s 2007 peak before the financial crisis sent the S&P 500 plunging by more than 50%. If you had invested in a basic S&P 500 index fund at the exact wrong moment before the market crashed, you’d be sitting on a return of more than 420% today.
Think about that for a minute — if you had invested $10,000 at the absolute worst time before the biggest market crash of our lifetime, your investment would be worth more than $52,000 today.
Investing through an IRA is a great way to take advantage of the long-term compounding power of the stock market, regardless of what it’s doing today, tomorrow, or next month. Investing consistently through a tax-advantaged retirement account has been one of the most reliable ways to build long-term wealth throughout modern history.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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