Should you put your money in the stock market? This is a common question, especially in light of the economic volatility currently resulting from record-high inflation, a supply chain crisis, and the continuing threat of COVID-19.
But there's actually a really simple way to answer this question that applies to anyone and everyone who is considering investing, either for the first time or by adding to their existing portfolios.
Is it a good time to start investing?
Many people assume the best way to decide whether to put money into the stock market is to look at economic conditions and whether the market is currently a bull or bear market. But the reality is this approach can be a faulty one.
See, it can be really difficult to predict when the market will hit rock bottom and when a recovery will begin. Trying to time the market and buy in when stocks are at their lowest point could mean you miss out on an opportunity to get your money working for you as quickly as possible. Missing even a few key days in the market could have serious consequences, leaving you with a nest egg that's as much as half a million dollars smaller than it could've been.
The reality is that if you invest in solid companies that will stand the test of time -- or if you invest in an S&P fund that tracks the performance of the market as a whole -- it doesn't matter exactly when you buy in. As long as you invest for the long-term, you stand to make money over time. And the sooner you start investing and getting your cash working for you, the more compound growth can help your nest egg grow exponentially.
So how do you decide if it's a good time to invest?
Rather than asking yourself if the market timing is right, you'll instead want to look at your personal financial situation instead. Specifically, you should consider:
- Whether you have an emergency fund: Investing when you don't have an emergency fund could be a mistake. When surprise expenses inevitably happen, you may have to either go into debt or sell stocks at an inconvenient time and lock in losses. It's best to have cash set aside for emergencies first before you put money on the line.
- Whether you have high-interest consumer debt: If you have payday loan debt, credit card debt, or other high interest debt, you could usually get a better return on your money by paying that off rather than investing. This isn't true for low-interest debt, such as a mortgage and student loans, as the ROI you can earn in the market is often higher than the interest rate on these types of debt.
- Whether you'll need the money you're investing within the next five years: You'll want to invest for the long-term to reduce your risk by ensuring you have time to wait out downturns and stay invested until the inevitable recovery occurs. As a result, it's not a good idea to put your money in the market unless you can leave it invested for five years or more.
- Whether you have a plan for what to invest in: You should understand your investment goals, know your risk tolerance, and have a plan to build a diversified portfolio with the appropriate asset allocation.
If you can check these items off your list, the right time to put your money in the market is right now so you can start putting your funds to work for you.