Is This Really the Right Time to Invest in the Stock Market?

The stock market has been rather volatile lately. The S&P 500 hit a high of about 4,819 over the past year and a low of about 3,667, representing a drop of nearly 24%. More recently, it was down close to 15% from its 52-week high. Those kinds of drops will have many investors wondering if it's perhaps a bad time to invest in stocks.

The answer, at just about any time, is that it's a fine time to invest in the market. Here's why.

Image source: Getty Images.

A down market is not cause for concern

For starters, market downturns happen fairly often, and severe ones happen not infrequently, as well. Between 2002 and 2021, for example, according to Schwab research, the S&P 500 index (which features 500 of America's biggest companies that together make up around 80% of the entire market's value) dropped in value by at least 10% every other year, on average.

Between 1948 and 2017, meanwhile, the S&P 500 dropped 20% or more every 6.3 years, on average, per research from the Capital Group.

The good news is that despite all these downturns, the overall stock market has gained ground -- and a lot of it -- over many decades. Those who have been invested in stocks and who have bought stocks along the way have had the opportunity to make a lot of money.

Market timing is difficult to impossible

Next, while it's tempting to try to time the market by guessing when it's about to rise or fall, that's not an effective way to profit. No one can really know what the market will do in the short term, and those who have made successful predictions have likely just been lucky.

Here's a sobering statistic: According to the Schwab Center for Financial Research, "Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 24% one year later." So if the market has fallen and you're afraid of buying stocks in case it falls more, you can easily miss out on a big rebound.

A time-machine exercise

Another danger is staying out of stocks after the market has risen significantly. This time-machine exercise might help you understand why:

Imagine that it's the end of 2012, and the S&P has posted solid gains for four years in a row. It might seem reasonable to expect it to pull back. But look at the table below to see what happened next: five more years of gains.

Source: Slickcharts.com. Returns reflect reinvested dividends.
*Year to date as of Sept. 12, 2022.

Look at 2018, too. At the end of that year, you might very reasonably have assumed that following many years of big gains, a big downturn has begun. But nope, that small drop in 2018 was followed by three hefty years of gains. There's just no way to know what will happen next, but if you're planning on investing and staying invested for many years -- ideally a decade or several decades -- you're likely to do well.

But keep in mind its unpredictability

All that said, it's important to understand that due to the short-term unpredictability of the stock market, you should only invest in it with money you won't need for a least five years -- if not 10 years, to be more conservative.

So now is a perfect time to invest in stocks, for most of us.

If you're now wondering just how to go about getting into stocks, consider starting with low-fee, broad market index funds, such as one that tracks the S&P 500. It's an easy and inexpensive way to instantly have a stake in most of the U.S. stock market. In fact, index funds are really all you need unless you want to take the time to learn more about investing.