The stock market has experienced some wild rides over the past century, but the coronavirus pandemic has caused one of the biggest market drops in history. The Dow fell more than 23% and experienced its worst first quarter in history this year, and this quarter has been the S&P 500's worst since 2008, dropping 20%.
Investing when the market is down can seem counterintuitive, and it might feel as if you're throwing your money in the fire. After all, why invest now if there's a good chance the country will fall deeper into a recession?
However, there are a few good reasons to invest now -- and also a couple of situations where investing might do more harm than good.
Why invest during a recession?
Times are tough for millions of Americans right now, and this recession could end up being one of the worst in history. In fact, roughly 70% of investors believe a COVID-19 recession will be worse than the 2008 financial crisis, according to a survey from Investors.com. However, of those survey participants, 60% also say this is one of the best opportunities to invest.
During a recession, stock prices are often at their lowest, meaning you can scoop them up for a bargain. Even if you're investing in index and mutual funds through your 401(k) or IRA, contributing more to your retirement account now means you're getting more for your money.
Eventually, the stock market will recover. It could potentially take years, but the market always does get itself back on track given enough time. By investing now, you will have a front-row seat to witness that recovery, and your investments should experience significant gains during that time. Then once you're ready to retire and start withdrawing your money, your investments should be much more valuable. In other words, investing now gives you a prime opportunity to buy low and sell high.
Investing right now can be intimidating, but keep in mind that the stock market will improve. Even if things look rough now, it won't be this bad forever. If you wait until the market bounces back before you start investing again, you'll miss out on these low prices and will end up buying when stock prices are high again.
When it's not the best time to invest
Right now might be a prime investment opportunity, but that doesn't mean everyone should be throwing their life savings in the stock market.
Once you invest your money, it's best to leave it alone for as long as possible. That means you should only be investing cash you know you won't need for the foreseeable future. If money is tight right now and there's a chance you might have to withdraw your cash soon after you invest it, it's best to avoid investing altogether for the moment.
Instead, you may choose to focus on building an emergency fund. Generally, you should aim to save enough in your emergency fund to cover three to six months' worth of living expenses. However, these are unprecedented times, and you could need more than that if you lose your source of income. Jobs are hard to find right now, so if you get laid off or furloughed, you might need to survive on your emergency savings for longer than you think.
Even if you're fortunate enough to have a steady source of income, it's still a good idea to build a healthy emergency fund just in case. You never know what might happen, and it's best to be prepared for anything. Once you have a solid emergency fund and a steady source of income, then you can focus on investing your extra cash.
The coronavirus pandemic has wreaked havoc on the stock market and millions of Americans' lives. If you've lost your job or are worried your income is at risk, you should probably focus on building an emergency fund and making sure you can pay the bills. But if you have cash to spare, taking advantage of this investing opportunity can potentially make you a lot richer in the future.