The U.S. stock market has fallen steeply over the past two months in response to the coronavirus pandemic, but it has partially bounced back numerous times over that period. This ongoing volatility confuses many investors who assume that the right time to invest is when markets bottom out.
The problem is that nobody knows when we've actually hit bottom. If we did, then investors would sit patiently keeping their money ready to buy at the ideal moment.
Stock markets aren't like buying candy on the day after Halloween. There's no way to know when a market downturn has hit its turning point. That means you should not even try to guess at it. The right time to buy stocks is essentially either "always" or "now."
Is now the right time to buy stocks? Yes. Image source: Getty Images.
Don't time the market
People who try to buy stock in a company at a low point and then turn around and sell it quickly when it rebounds are not investors, they're traders. Being a trader seems tempting until you realize that it's basically playing roulette. You may win sometimes, but you're not going to win consistently, and ultimately, you're playing a game in which you won't make money.
Investors look at things differently. They don't worry as much about buying at the lowest possible price. If you buy shares of good companies and hold them for a decade, then it's not important if you bought in at the absolute bottom.
Look, for example, at Amazon (AMZN -0.55%) which is currently trading at nearly $2,400 per share. If you bought shares a decade ago, would it really matter to you if you got in at $200, $250, or even $500 a share? In all cases, your gains since buying in are astronomical. Those gains don't come from timing the market. They come from identifying a good company, buying shares, and being patient.
Image source: YCharts.
Beware perceived value
It seems scary to pay $2,400 for a share of any company. That's, of course, a lot of money to most people and it seems like a lot to pay for one of anything. That often leads people to buy shares of stock based on price.
You could, for example, buy roughly 9,600 shares of J.C. Penney for the cost of a single share of Amazon (based on pre-market prices for each company on April 23). It's true that 9,600 is way more than one, but do you honestly believe that you're better off owning more shares in a retailer poised to file bankruptcy than one share in a company set to dominate the retail market for decades to come?
And, of course, you don't even have to buy one full share of Amazon. There are easy ways now for you to buy a fractional share in a company and, if the share price goes up 10%, your fractional investment goes up 10% too.
That's not to say that you can't find good companies to buy shares in that cost a lot less than a share of Amazon. But it's important to remember that a low price is not how you determine value.
Find good companies and wait
Investors make money on the stock market by buying shares in companies they believe will perform well in the long term, then waiting to see what happens. That's not as fun as guessing that a company has bottomed out and that it will recover soon, allowing you to (theoretically) make a quick buck.
The goal, however, isn't proving that you're smarter than everyone else in the short term -- you're almost certainly not. It's investing for your future and for your retirement.
Be an investor, not a trader. That means that now is the time to buy stocks, and so is tomorrow. Identify good companies, buy shares, and then let the magic of time do its thing. You won't always win, but in the end, past market performance suggests that you will see your portfolio grow.
