With Election Day behind us, many investors may be wondering whether now is a good time to buy stocks. Sure, political tension drags on and uncertainty remains. But market indexes have surged higher recently, suggesting the Street believes the worst of 2020 may be behind us. On the other hand, recent gains in the stock market mean investors now have to pay a higher price tag to invest. Could stocks come crashing down soon, giving investors an even better buying opportunity?
As you think through whether you should buy stocks right now, here are some helpful frameworks from great investors to guide you.
Don't try to time the market
Unfortunately, there's no cut-and-dried answer as to whether the market will provide investors a better entry point today, next week, next month, or a year from now.
If someone as smart as Buffett largely made his fortune by avoiding market timing, it would be wise to follow his advice.
Renowned investor Peter Lynch puts it best: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
Imagine investors who sold during the coronavirus market crash and refrained from buying back during the rebound, believing that stocks would fall again. Many of these investors likely missed out on much of the market's gain in 2020.
Timing the market is nearly impossible. Don't do it.
Time in the market is what counts
While stocks are incredibly difficult to predict in the near term, history suggests the market's compounding power will ultimately lead to higher stock prices over the long haul.
If the overall stock market is difficult to predict in the short term, but is likely to rise meaningfully in periods of five years or more, what's the best plan? Probably to invest in the market in a pre-determined and methodical manner, ruling out market noise entirely. Once you invest, you'll get the biggest bang for your buck by staying invested.
As the old adage goes, time in the market is far more important than timing the market. Or take it from investor Charlie Munger: "The big money is not in the buying and selling, but in the waiting."
If you're brave enough to venture into choppy waters and invest your capital today or over a pre-determined time period, expect volatility.
It's an unavoidable part of investing. As behavioral finance author Morgan Housel often says, volatility is the "price of admission."
Turbulence can get pretty brutal. Let's revisit a steep drop in stocks that occurred earlier this year. Between Feb. 19 and Mar. 23, the S&P 500 fell a whopping 34%. Sharp market downturns often come when you least expect them, and it's impossible to predict when they'll hit bottom. If you want to benefit from the compounding power of the U.S. stock market, you'll need to commit to enduring these big pullbacks.
For perspective on why you should plan to lose money at some point after your initial investment, consider this quote from investor Joel Greenblatt: "Unless you buy a stock at the exact bottom (which is next to impossible), you will be down at some point after you make every investment. Your success entirely depends on how dispassionate you are toward short-term stock price fluctuations."
If you insist on timing the market, stocks probably aren't for you. If you heed the wisdom of the great investors who have proven themselves over decades, there's no reason to decide whether now is a good or bad time to invest. For those willing to keep their capital in the game for the long haul, it's always a good time.