The stock market has been trading at all-time highs -- a trend that seems disconnected from mounting concerns about the economy, which has been shuttered because of COVID-19. As a result, you may have found yourself sitting on the edge of your seat waiting for a crash.
If you've been stalling and waiting for the bubble to burst, now is an ideal time to get off the sidelines for these four reasons.
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1. You'll benefit from compound interest
If you invest $10,000 today into a large-cap stock fund that earns 8% on average each year, you would have $10,800 after a year. Over the next year, your account's original $10,000 will earn 8%, as will your $800 in earned interest from the first year. This is called compound interest and happens when the money you gained through earned interest also earns interest.
The more time your money is invested, the more interest accumulates and the more dramatic the effect that compounding has. Using these assumptions, if you never added another dollar to your original investment, in 10 years, you would have $21,589; in 20 years, $46,610; and in 30 years, $100,627.
The power of compound interest plus your annual rate of return would help your original contribution grow to more than 10 times as much in 30 years' time! This type of exponential growth can help you reach your goals faster.
2. You have time on your side
Money that you plan on using over the next year or two
should be kept out of the stock market. And even money that you plan on using in five or six years should be invested more conservatively. But as long as you're investing with an account that you plan on using for long-term purposes, history has shown that having time on your side works in your favor. Even if your worst fears do come true and the stock market crashes.
If you invested $50,000 into large-cap stocks at the beginning of 2008, you would've seen your account balance drop to $31,500 by the end of the year because of the Great Recession. But if you'd kept your money invested for the long term, at the end of 2020, you'd have more than $168,000 -- more than triple your starting value.
3. Timing a bottom is hard, and you may miss out on gains
If you're not investing right now, it might be because you're afraid that you will put money into stocks and that a bear market will immediately follow. This would mean that you bought your holdings at a high price and could result in you seeing a loss in your investments almost directly thereafter.
As terrifying as this may sound, the cost of trying to time the market
and figure out exactly when this may happen may cost you even more. If you thought that the stock market was headed for a complete crash in 2020 and you sold at the bottom on March 20 when the S&P 500
closed at 2,237.40, you would've missed out on almost 75% in gains since then.
4. You can contribute slowly over time
Coming up with a large lump sum for a particular goal is not always easy. Saving for something like retirement or college is more attainable if you can contribute smaller amounts over a long time, which will accumulate into a large amount of wealth in the future.
For example. If you add $8,000 to a retirement account starting at age 35 for 30 years, earning 8% each year on average, by the time you reach age 65, your accounts would be projected to grow to nearly $979,000! Investing this way will also let you capture different stock prices throughout different market cycles, which can lower your chances of buying everything you own at high prices.