The 2023 stock market bounceback has been a pleasant surprise for many investors. All three major indexes -- the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite -- are up for the year. This is a far cry from the "impending doom" predictions that seemed to occupy a lot of stock market talk heading into 2023.
Given the market's performance year to date, investors may be wondering if a new bull market is coming. However, I think that's the wrong approach right now. The better question to ask yourself is how much you can afford to invest, whether it's a bull market or not.
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Determine if you're in a position to invest right now
Before investing, you first want to ensure that you have an emergency fund saved up. There's no concrete goal for an emergency fund, but a good rule of thumb is to have at least three to six months' worth of expenses saved up. People with families should consider having six months to a year to be on the safe side, especially during times when there's a lot of economic uncertainty.
Once you've established your emergency fund, you should prioritize paying off high-interest debt like credit cards. Remember: Interest on debt is guaranteed; stock market gains are not. Earning less (or losing) on investments than you owe in interest on other debts is counterproductive.
After you've taken care of those two priorities, you should have a better idea of how much you can afford to invest each month. After that, the investing can begin.
A bull market will inevitably happen
The stock market itself is cyclical in nature. Some cycles last drastically longer than others, but it's cyclical nonetheless. Part of this can be attributed to the cyclical nature of the economy -- going from growth and expansion to contraction -- and part is investor sentiment occasionally changing. Pessimism in the market can lead to sell-offs and bear markets, while optimism can lead to increased investing and bull markets.
Like death and taxes, bull markets are inevitable. They've always happened, and nothing points to that ever changing in the stock market as we know it today. The stock market's most important index, the S&P 500, has experienced around 27 bull markets since 1928.
Luckily for investors, stocks tend to rally more and longer in bull markets than they drop in bear markets. Bull markets have averaged 115% gains in 2.7 years, while bear markets have lost around 35% and lasted less than a year.
This doesn't guarantee it'll continue to happen that way, but that's encouraging for investors trying to stomach the stock market's volatility.
Focus on consistency over timing
Once you come to terms with the repeating cycle of bull and bear markets, you realize consistency is what matters.
A strategy I use to keep me consistent is dollar-cost averaging. When you dollar-cost average, you decide on a set amount to invest and put yourself on a non-negotiable (within reason) schedule. For example, someone who decides they can invest $1,000 monthly could break it down to $500 investments every other Friday, $250 investments every Monday, or however they see fit.
Being on a set schedule is one of the easiest ways to remain consistent as an investor. If you're committed to investing X amount at Y time, you don't have to harp too much on stock prices because you'll be investing regardless. You'll inevitably invest when stock prices are higher, but the opposite is also true.
A lot of the idea behind dollar-cost averaging is to remove the emotions -- and urge to try timing the market -- from investing. It sounds a lot easier in theory than in practice, though. It's not easy to continue investing while stock prices are falling during bear markets, just like it's not easy to stick to your schedule when you see stocks rallying during bull markets.
You want to know what's happening in the stock market, but you don't want every fluctuation or swing dictating your investing moves. Timing the stock market correctly is all but impossible to do consistently long term, but every investor can be consistent. Make that your focus.
