The stock market has been thriving in recent months. The S&P 500 is up nearly 25% from its lowest point in October, and the Nasdaq is surging more than 35% from its late-2022 bottom.
Many experts are calling this the beginning of a new bull market, as major indexes have risen by more than 20% from their lows. Others, however, argue that it's not a bull market until these indexes hit a new all-time high -- which is a point none of them have reached yet.
Are we really in a new bull market? Or is this just a temporary rally? Here's why it doesn't necessarily matter.
Don't get hung up on a new bull market
It's tempting to try to time your buying so that you're setting yourself up for the best returns possible. However, the market can be unpredictable, and nobody knows for certain what will happen over the next few weeks or months.
While stock prices could continue to rise, there's also a chance a downturn is on the horizon. More than two-thirds of Americans are expecting a recession later this year, according to a 2023 survey from Nationwide. If that becomes a reality, the market could dip.
If you're waiting for the perfect time to invest, then, you'll likely end up waiting forever. Timing the market accurately is next to impossible. Instead, it may be wiser to invest consistently, regardless of what the market is doing.
This strategy is called dollar-cost averaging and involves investing at regular intervals throughout the year. Sometimes, you'll end up investing when prices are higher, and other times, you'll buy at a discount. Over the years, though, those highs and lows should average out.
Is now a smart time to invest?
With a long-term outlook, there's never necessarily a bad time to invest. Even if you buy now and stock prices fall later this year, it may not have a drastic effect on your long-term savings.
For example, say you had invested in an S&P 500-tracking fund in January 2009 -- just before the market bottomed out during the Great Recession. At that time, it may have seemed like a terrible time to buy, as your portfolio would have almost immediately lost value.
However, over the next five years, you'd still have earned returns of over 100%. By today, you'd have seen returns of close to 400%.
In other words, the market's long-term potential is more important than the short-term turbulence. Rather than waiting for the perfect time to buy, it's often best to simply invest consistently over the long haul and ride out the waves of volatility.
The key to maximizing your returns
Regardless of whether we're in a new bull market or not, there are steps you can take to reduce your risk and maximize your long-term returns:
- Only invest money you can keep in the market: There's always a chance that stock prices could fall later this year. If you invest all your spare cash and then need to pull your money out of the market after prices have dropped, you'll risk selling your investments for less than you paid for them -- locking in your losses. It's wise, then, to only invest money you can afford to leave in the market for at least several years.
- Avoid getting caught up in short-term fluctuations: If more volatility is on the horizon, do your best to maintain a long-term outlook and avoid making any rash decisions. Your portfolio could temporarily drop in value if stock prices fall, and that's OK. Again, the market's long-term potential is more important than the short-term ups and downs.
- Invest in the right places: The right investments will give your portfolio a far better chance of surviving even the worst downturns or recessions. Strong stocks come from strong companies with solid underlying fundamentals -- such as healthy financials, a competent leadership team, and a competitive advantage. The more of these stocks you own, the better off you'll be.
We may be in the early stages of a new bull market, or stock prices could have further to fall later this year. Either way, though, it shouldn't affect your long-term strategy. By investing in the right places and continuing to invest consistently, regardless of what the market is doing, you can protect your portfolio as much as possible while still building long-term wealth in the stock market.
