The last couple of years have been a wild ride for the stock market, and if you're nauseated by all the ups and downs, you're not alone.
Many experts have predicted everything from a major market crash to a 2008-style recession in recent months, leaving investors confused about where stock prices are actually headed.
The market's continued volatility hasn't helped with that confusion. While the S&P 500 is still up by more than 11% since the beginning of the year, stock prices have faltered a bit lately -- with the index down by nearly 7% since late July.
So is it really safe to invest in the stock market right now? Or should you hold off in case another downturn is on the way? The answer might surprise you.
Is now the right time to invest?
It's tempting to try to invest at just the right moment. In hindsight, it's easy to look back and think about how much you could have earned if you'd invested at the market's lowest point and then sold your stocks as prices peaked.
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In reality, though, timing the market effectively is next to impossible. As the last couple of years have proven, even the experts don't know for certain how the market is going to perform. If you bet everything and buy or sell at the wrong moment, it could be costly.
A much safer alternative is to simply keep investing regardless of what the market is doing. This strategy is called dollar-cost averaging, and it involves investing a set amount at regular intervals throughout the year, rather than investing everything you have all at once.
When you're investing consistently, you'll end up buying both when prices are at their peaks and when they're at their lowest points. Over time, these highs and lows should average each other out. This can not only save you money, but it also takes the guesswork out of deciding when to invest.
The key to keeping your money safer
Dollar-cost averaging often makes it easier to invest during periods of volatility because you don't need to worry about what the market is doing on a day-to-day basis. But it's equally important to keep a long-term outlook.
When you're investing regularly throughout the year, there may be times when you invest at seemingly the worst moment just before stock prices drop. But the market's long-term performance is far more important than its short-term ups and downs, and it's still better to invest at the "wrong" time than to put off investing entirely.
For example, say you had invested in an S&P 500 index fund in February 2009 -- just before the index bottomed out amid the Great Recession. Your investment would have almost immediately lost value, but by the end of the year, you'd have earned returns of more than 35%.
On the other hand, say you held off on investing until August of that year -- when the market was already well into recovery mode. While that may have seemed like the safer strategy at the time, you'd have only earned returns of around 13% by the end of the year.
When you're keeping a long-term outlook, there's not necessarily a bad time to invest. You may experience short-term losses if the market takes a turn for the worse, but as long as you hold your investments until stock prices recover, you could earn far more than if you're waiting for the perfect time to buy.
One important caveat
The final thing to keep in mind is that regardless of when you invest, choosing the right investments is critical. Weak companies will have a harder time recovering from market downturns, and if your portfolio is full of shaky stocks, you could lose more than you gain.
The best stocks are from companies with solid underlying fundamentals, such as healthy finances, a competitive advantage, and a strong leadership team. These stocks will still often experience short-term volatility, but they're far more likely to recover and go on to see long-term growth.
With strong stocks in your portfolio and a long-term outlook, it's much more likely your investments will recover from even the worst downturns. And by investing consistently, you can set yourself up for substantial earnings over time, regardless of what the market is doing right now.
