The stock market's sharp drop earlier this year likely spooked many investors. Between Feb. 19 and March 23, the S&P 500 lost more than a third of its value. This put an abrupt end to the longest bull market in history, which lasted between 2009 and early 2020. The sudden crash after a prolonged bull market likely rattled many investors, causing them to question the long-term prospects of stocks overall.
But the overall stock market has rebounded sharply from lows in March. While a huge and rapid upward movement since then has benefited those who were adding to their positions when fear surrounding the coronavirus and its impact on the economy peaked, more cautious investors who opted to stay on the sidelines during this time may be feeling like they've missed their opportunity to buy stocks at lower prices.
Is this still a good time to invest in stocks? Or have investors missed their chance to buy stocks and profit?
Here are three reasons why this is still a good time to buy stocks.
1. Stocks are still on sale
While the overall stock market has certainly surged higher since the coronavirus market crash bottomed in March, there's good news: stocks are still on sale. Most market indices still trade substantially lower they did before the coronavirus brought the economy to a screeching halt and sent the market plummeting. The S&P 500, for instance, is still down about 11% from highs earlier this year.
Sure, there's no guarantee that the market won't fall again in the near future. But for investors willing to hold stocks for the long haul, they can buy into the S&P 500 at a much better price today than they could earlier this year. In fact, investors can do exactly this by buying shares of an index fund or an ETF that reflects the allocations in the S&P 500.
2. Stocks have endured major economic setbacks before
The coronavirus' impact on the economy was undoubtedly severe and startling. Unemployment claims skyrocketed to never-before-seen levels as a large portion of the economy temporarily halted. In many countries across the world, travel was restricted, stores were shut down, manufacturing was paused, and consumers sheltered at home as governments made efforts to slow the spread of the coronavirus.
Fortunately, the daily new cases in the U.S. have primarily been trending downward for weeks and the economy is reopening. But the economic damage was real and the government was forced to infuse the economy with fiscal stimulus. Further, the long-term ramifications of these unprecedented times are still unknown.
Investors, however, should note that this isn't the first major economic setback stocks have endured. Indeed, stocks suffered major downturns during the Great Depression, World War 2, the financial crisis of 2008 and 2009, and many other difficult challenges. Yet stocks not only recovered but also rose to new highs in the years to follow every one of these market headwinds. Indeed, over the last 100 years, the Dow Jones Industrial Average has compounded at an average annual rate of about 10%, assuming dividends were reinvested.
While there will likely be many bumps along the way, history suggests stocks will be trading substantially higher in 10 years than they are today.
3. Timing the market is a fool's errand
Most importantly, the reason now is a good time to buy stocks is because it's arguably impossible to time the market anyway. Since there's no way to know where the bottom is or when the next crash is coming, investors should refrain from timing the market entirely. This means it's essentially always a good time to buy stocks.
Sure, when stocks are trading lower it likely makes sense to be a more aggressive buyer than when they are trading higher. But there's no way to know where stocks will be in a month, next year, or even several years out. Investors, therefore, are better off buying a slice of the market via an index fund or buying a diversified portfolio of high-quality companies and holding those positions for the long haul.
As famed investor Warren Buffett said in Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) 2012 shareholder letter, "Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'experts,' or the ebb and flow of business activity." Instead, investors should simply maximize the amount of time they have been invested in the market, Buffett advised. "The risks of being out of the game are huge compared to the risks of being in it."
Buy stocks now
So, stop sitting on the sidelines and consider buying stocks now.
Of course, don't invest money you may need within the next five to 10 years. In addition, plan for (and even expect) major declines in your portfolio, as there's no telling when the next major market crash is coming. Anything can happen in the near-term.
The stock market, however, is a wealth-building tool optimized for the patient. Over the long haul, odds are that the compounding power of American business will help investors generate meaningful investment returns, just as has been the case for the last 100 years -- through recessions, wars, and pandemics.