In the stock market and economy, much of 2022 was defined by falling share prices, high inflation, and fears of a looming recession. These problems were expected to persist with many Wall Street analysts and economists believing they would last well into late 2023 and 2024.
Fortunately, that hasn't been the case thus far this year. Inflation is cooling, a "soft landing" seems more plausible, and all three major stock market indexes are up year to date.
Data by YCharts.
While the stock market rally is good news for investors, it's also been a cause for concern among those who believe these recent surges over such a short period could lead to inflated valuations and stock prices. However, instead of wondering if it's safe to invest in this environment, I believe there's a better question to ask: Where will the market be 10 to 20 years from now?
Don't let rallies discourage you from investing
Famed investor Warren Buffett once said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." This applies to the current state of the stock market, especially with tech stocks and many blue chip companies climbing higher this year.
When any company rallies, there's a chance it'll become "overvalued" based on common valuation metrics. However, this shouldn't be a deterrent for long-term investors. There's a chance that stock prices correct, but there's also a chance that a rally sets a new "floor" for a stock.
Let's take a company like Nvidia Corporation as an example. Here are some recent rallies the stock has experienced and roughly how much it's up since the end of those rallies (as of July 18):
| Time Period | Price Change During Period | Price Change Since Period Ended |
|---|---|---|
| March 2020 to Sept. 2020 | 150% | 260% |
| Oct. 2021 to Nov. 2021 | 60% | 60% |
| Jan. 2023 to May 2023 | 90% | 65% |
Source: Google Finance.
In the wake of those short-term spikes, Nvidia has still managed to deliver strong returns. This is the case with many great companies. Don't miss out on these stocks because you feel you've missed the train after the stock price surges.
Investment hesitation works both ways
Just as investors are hesitant about investing after a huge rally, they also tend to stay on the sidelines when stocks are falling. Down periods in the market shouldn't be a time to stop investing. If anything, it's time to become an opportunist and take advantage of any bargains you can find.
Assuming you're investing for the long term, the short-term bumps along the way can largely be ignored. Such volatility is inevitable. Smart investors learn this early and avoid making emotional (and counterproductive) moves that don't align with their strategy and goals.
Continuing our Nvidia example, the stock plummeted 50% from Sept. 2018 to Dec. 2018, another 30% from Feb. 2020 to March 2020, and 65% from Nov. 2021 to Oct. 2022. As shocking as those losses may have been, investors with a long-term mindset can take comfort in the fact Nvidia stock is up more than 600% since that first sell-off began in Sept. 2018.
Investors who sat on the sidelines during those times out of a fear of falling prices have missed out on impressive gains.
Don't get in the habit of trying to time the market
Whenever you begin to question if it's a good time to invest, you're teetering on the edge of trying to time the market. It might seem logical to wait if you think stock prices will begin (or continue) to fall, but the key word here is "think."
Nobody can say with certainty how the stock market will behave in the near term. Not me, Cathie Wood, Carl Icahn, the legion of analysts on Wall Street, and unfortunately, not you, either. Investors can make educated guesses based on history and technical analysis, but it's still just a guess.
Instead of attempting to time the market in this way, investors should focus on consistency because that's really what matters most in the long run. An easy way to remain consistent is by incorporating a strategy like dollar-cost averaging, which involves investing a fixed amount at set intervals. For example, if your investing budget is $1,000 monthly, you could break it down to four $250 investments every Friday.
You'll inevitably buy stocks when they're overvalued, but the opposite is also true. The goal is to remove as much emotion as possible from investing and trust that the market will be higher 10 to 20 years from now. Remember: Time in the market is more important than timing the market. Stay the course and save yourself some stress along the way.
