While headlines about tanking stocks probably scare new investors from taking the plunge, it's actually the perfect time for investors who have been thinking about taking a position in the stock market to finally make a move. Read on about why -- and how to make it work.
Buy low, sell high
This is the very foundation of good investing. So, while the economy is unraveling and stock prices are plunging, don't get too nervous -- it's the opportunity you've been waiting for to purchase quality stocks at low prices.
Companies such as Nike (NKE 0.58%), Coca-Cola (KO -0.61%), and Disney (DIS 1.62%) have rewarded their shareholders with high returns over time, and now you can scoop them up at their lowest prices in years. Disney's and Coke's share prices haven't been this low in more than five years, but look how much they've returned over the 10-year period between March 2009, after the last market crash, and March 2019:
Return (March 2009 - March 2019)
And for readers who are thinking, "But didn't they all just lose that?" Check out those returns from March 2009 through today:
|Return (March 2009 - March 2020)
Despite this market setback, investors who bought after the financial crisis and held are still way up.
Don't look for the next big thing
This is the way to steady and long-term investing success. When the dot-com bubble burst, many shareholders were left with nothing, having burned their cash in investments in companies that had a lot of hype but little revenue and no bottom line. Don't expect to find the next big secret and make a windfall.
You're investing in companies, and that's the key to building wealth over time. The companies I mentioned above all have proven track records of creating revenue with solid business platforms and holding themselves accountable to shareholders.
Since you probably won't be seeing high returns on your stock picks in the coming months, get in slowly. In the current situation, people need to be sure they will have income over the next few months to cover basic necessities. If you have cash to invest, buy a little bit at a time, and see how the market plays out over the next few months instead of throwing a lot into an uncertain market all at once.
It can be crushing for investors to see portions of their retirement funds disappear into thin air, so remember, it's just on paper. The prices will almost certainly go up again, and if your retirement is still far beyond the horizon, today's declines aren't even harmful. The Dow dropped 10 years ago, and 20 years ago, and it always came back stronger.
Don't try to time the market
Yes, there have been years that the Dow closed out with a high return, such as 2019. And if we were all prophets, we'd know exactly when to pull out our cash for maximum returns. But we're not, and short of some speculative traders and lucky investors, we shouldn't be thinking about timing the market. After all, over time even several years of bad performance have difficulty suppressing the long-term wealth creation of the stock market.
Consider the Dow's returns over these periods:
Don't be discouraged if returns are poor in the near-term. My favorite professor's directive was always to believe in the market. The market will return you money over time. Just don't expect too much too soon. If you happen to see big gains early, great. But it's nearly impossible to time the market.
Prepare for volatility
While this is a great chance to buy stocks, keep in mind that because of the nature of the current financial situation, new investors might be in for a roller-coaster ride. No one can know the precise moment of the bottom-out, so it's likely everyone will see some short-term losses.
Investing in the stock market can be exciting and make people richer. Starting now can increase your long-term returns.