The recent declines in many indexes and popular stocks have led some investors to wonder if now is the time to be buying stocks. The short answer is yes.
Bear markets are inevitable
One thing that's inevitable in investing is volatility; it's a tale as old as investing itself. While daily fluctuations in market prices are not good indicators of trends, investors use periods of market movements to categorize a market as either a bull market or a bear market. Bull markets are used to describe rising prices, and bear markets are used to describe declining prices.
In January 2022, the S&P 500 had its worst month since the start of the COVID-19 pandemic in March 2020, declining by 5%. While this alone isn't enough to declare a bear market (several institutions use a 20% threshold), many believe we are approaching bear market territory after a long bull market. If you're a long-term investor, it's best to realize bear markets are inevitable, and that the short-term movements of stock prices shouldn't affect your outlook on investing in the long run. Bear markets don't last forever.
Image source: Getty Images.
Focus on dollar-cost averaging
Unfortunately, it's easy to sometimes let emotions guide your investing decisions. Dollar-cost averaging is a good strategy to help stop yourself from trying to time the market -- something that is virtually impossible to do consistently. Instead, you make consistent investments at regular intervals, regardless of stock prices or market conditions. Let's say you have $12,000 you want to invest. Instead of investing it all at once, you could choose to break down the investments like the following:
| Frequency | Number of Investments | Amount of Each Investment |
|---|---|---|
| Weekly | 16 | $750 |
| Monthly | 8 | $1,500 |
| Quarterly | 4 | $3,000 |
| Bi-annually | 2 | $6,000 |
Data source: author calculations.
The exact amount and frequency you choose don't matter as much as the fact that you remain consistent. One of the main problems with trying to time the market is you risk investing lump sums right before the market or a specific stock plunges.
Imagine you had the previously mentioned $12,000 and were interested in investing in Meta Platforms, the formerly named Facebook. Had you invested all of it on Feb. 2, 2022, when the share price was $323, you would've bought just over 37 shares. The next day, shares of Meta dropped by 26%, which would've instantly brought your investment total down to around $8,900.
Of course, you can't predict when something like this may happen, but by incorporating dollar-cost averaging, you protect yourself from such events. If anything, it gives you a chance to potentially lower your cost basis. Time in the market is more important than timing the market.
Focusing on the long term is what matters
If you're investing, it helps to focus on the long term. If anything, you can view periods of declining markets as a chance to grab your investments at a "discount." If you believe in a company and are willing to invest in it with the stock price at $150, a drop to $125 shouldn't cause you to panic; it's a chance to increase your overall holdings for cheaper if you so choose. Your financial future is what matters -- you can't go wrong keeping that in mind with your investing decisions.
