With the S&P 500 index up a hefty 15% so far in 2023 (at the time of this writing), many investors or would-be investors are wondering whether it's safe to invest in stocks now. They figure, reasonably, that the S&P 500 will either keep rising or will retreat some, but they don't know which will happen.
Here's some information that can help you decide whether it's safe for you to invest in stocks now.
You can't know what the market will do next
For starters, know that no one can accurately and consistently predict what the overall market or any particular stock will do in the coming days, months, or even years. Sure, some prognosticators have been lucky on some occasions, but they've been wrong, too. No one knows.
Here's what we do know, though: Over very long periods, the stock market has risen. It has done so despite every market correction and crash, and every recession -- always recovering and going on to new heights. (With individual stocks, as long as a company is healthy and growing, its stock is likely to grow in the long run, too.)
The table below will shed some light on why it's pointless to try to guess what the market will do next. Imagine, for example, that it's the beginning of 2016 and the S&P 500 has notched gains for a whopping seven years in a row. You might reasonably expect it to drop in 2016, right? But no -- it gains a little more. Surely 2017 will feature a big drop, right? Nope, it posts a big gain of almost 22%.
So 2018 will be the big drop, right? Well, yes, the S&P 500 finally took a breather in 2018, slipping 4.4%. But the next year, it surged more than 30%! The stock market is volatile. Over many decades, though, the stock market has averaged annual gains of close to 10%.
Year |
S&P 500 Return |
---|---|
2008 |
(37%) |
2009 |
26.5% |
2010 |
15.1% |
2011 |
2.1% |
2012 |
16% |
2013 |
32.4% |
2014 |
13.7% |
2015 |
1.4% |
2016 |
12% |
2017 |
21.8% |
2018 |
(4.4%) |
2019 |
31.5% |
2020 |
18.4% |
2021 |
28.7% |
2022 |
(18.11%) |
2023 |
15.03%* |
So based on the table above, it would seem crazy not to invest in stocks now. But let's consider some other factors.
Are you ready to invest?
You need to be ready to invest before plunking your hard-earned dollars into the stock market. For example:
- Have you paid off your high interest rate debts? It will be hard to get ahead if you're earning, say, 8% to 12% on your investments while paying 25% on debts.
- Do you have an emergency fund that can support you for a while (three to six months) if you suffer a job loss, for example?
- Have you learned enough about investing to be comfortable with what you're doing?
- Are you investing money that you don't expect to need for at least five years? Remember the table -- you don't want the market to swoon just before you plan to sell stocks for a down payment on a home.
Keep mistakes to a minimum
When you invest in stocks, you'll want to keep money mistakes to a minimum. Here are some common blunders:
- Having unrealistic expectations, such as planning to double your money every two years. Remember that 10% is the average annual market return. Warren Buffett, arguably the best investor around, has roughly doubled that over 50-plus years -- so don't be expecting 30% returns regularly.
- Investing in penny stocks. Yes, you might be able to snag 5,000 shares for only $500, but just because a share of stock costs $0.10 doesn't mean it's cheap -- it can easily become a $0.02 stock, while a $350 stock might triple in a few years.
- Investing with borrowed money "on margin." This practice can amplify your gains by a lot, but it can make your losses much, much worse, too.
- Engaging in day trading. Various studies have shown this to be a money-losing strategy for many. Trust in the long-term growth of the market and of wonderful and healthy businesses.
The best way for many of us to invest is simply to regularly add money to one or more low-fee, broad-market index funds. They require little research and little attention. Over decades, they can grow powerfully for you.
So, should you invest right now?
For many people, the answer is yes -- because there can be a big cost to waiting.
If you're not sure, though, wait and learn more first. If you're investing a big chunk of money, perhaps from an inheritance, or if you're just nervous about your first move, you can invest in installments over time.