With markets down in 2022 and the economy showing signs of weakness, thanks in part to the central bank's aggressive rate-hiking policy this year, investors are asking themselves if now is a good time to be a buyer of stocks. This thought process is completely rational. If things are going to get worse, maybe waiting is the best course of action.
So, is now a good time to invest in the stock market? Let's take a look at three questions you need to ask yourself before making a decision.
Do I have extra cash available to invest?
Before you even think about putting money into the stock market, your top priority should be to remove any landmines from your personal finances. That means paying off high-interest debt. This includes credit cards or any personal loans you might have. The interest rates you're paying on those borrowings likely exceed the potential returns you'll achieve investing in stocks. Plus, paying off that debt can boost your credit score.
After this, try to set aside a small emergency fund, or enough cash to cover your expenses for three to six months. This ensures that you have a solid financial cushion should any negative event happen like losing a job or a major illness. Because you know there's a safety net, the added benefit of an emergency fund is that it can help you sleep better at night and reduce stress. You can't quantify how important this is.
Once high-interest debt is taken care of and you have an emergency fund, you're in good shape.
Can I resist trying to time the market?
With the market down in 2022 and many believing that a recession is on the horizon for the U.S., it might be a good idea to play it safe and simply hold cash in your portfolio until the economic picture gets better. After all, it seems every day there's a fresh headline of a business laying off a sizable chunk of its workforce in preparation for a downturn.
Despite this pessimism, one thing is certain -- no one can accurately predict when the stock market is going to bottom out before it starts to rise again. No matter how smart someone's forecast sounds or how much credibility they might have, it's best for investors to ignore the noise. There are just way too many factors that affect the markets and the economy that even attempting to figure out what's going to happen in the next quarter or even year is a waste of time. If your time horizon is decades, then calling the bottom won't matter in the long run anyway.
With this in mind, my recommendation is to dollar-cost average into your positions, or buying at different price points based on a set schedule. This essentially eliminates the need to time the market in the first place, and it encourages important habits: regular saving and investing.
Are there good investment opportunities?
If you've taken care of your personal finances and accepted you're not a stock market soothsayer, then the final thing on the checklist is to figure out what investment opportunities are available right now. With the S&P 500 and Nasdaq Composite down 16% and 26%, respectively, in 2022, index funds are themselves a great option.
But if you're an investor who prefers hunting for individual stocks, look for high-quality businesses that possess competitive advantages that can help them maintain a strong position in their industry. One such company that immediately comes to mind is Home Depot. The massive home improvement retailer has increased revenue 107% and earnings per share nearly 450% over the past decade. And because it operates in what management estimates is a $900 billion industry, the company still has a tremendous growth runway in the years ahead (Home Depot's trailing-12-month sales totaled $155 billion).
Shares currently trade for a cheap price-to-earnings ratio of 18.8, lower than their 10-year average and the broad market. This means Home Depot stock can be a good buy today for investors who plan to hold for the long term.
If you take the time to evaluate your personal situation with these three questions, you can make a well-informed choice on whether or not to invest right now.