There's a witty quote from Mark Twain that goes, "October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February." In other words, there's no good time to buy stocks, which is true in some regards. But instead of asking if now is a good time to invest, you'll be better off asking if you can afford not to invest.
A limited slate of options
When it comes to your money, you only have so many choices. You can spend it as fast as you make it, but that will mean no cash for the future if you need it in an emergency. And forget about a comfortable retirement. A much better idea is to live below your means and set aside the rest of your earnings as savings.
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But that opens up even more questions. Where do you put the money you are choosing to save? An emergency fund in a bank account or CD is a great first goal, but you'll only need three to six months of living expenses to create a realistic emergency cushion. Then what? You can leave it in the bank, but inflation is typically going to eat away at the earning power of those dollars. The chart below shows iShares Ultra Short-term Bond ETF (ICSH 0.01%), which rewards you similarly to a CD or bank account. One look is all you need to see that the return over time is pretty meager.
ICSH Total Return Price data by YCharts
Then there are bonds. These are basically IOUs, which sounds simple, but individual bonds can be very complex, and even bonds from the same issuer can have very different terms. There's also a risk spectrum to consider, with high-yield bonds (usually issued by financially risky companies) exposing investors to more downside than government-issued debt like U.S. Treasuries. Bonds are a reasonable place for some of your money, but bonds generally provide lower, though more consistent, returns than stocks. For diversification purposes, having exposure to bonds via a bond fund makes sense, but it is unlikely to be the best place for all of your savings.
That leads you to stocks, which are among the riskiest assets you can buy. Pay too much and you can end up losing money. Try to time the bottom and you could catch the proverbial falling knife. The best answer is probably to dollar-cost average, which just means you should keep investing throughout Wall Street's inherent ups and downs. This is probably where most of your money will end up, particularly if you are young. (Shifting more toward bonds as you age can help to reduce risk, but the ongoing ravages of inflation suggest that you should always have some exposure to stocks.)
Here are some numbers to consider
If you are wondering why stocks are so attractive, take a look at the graph below. It is a comparison of SPDR S&P 500 ETF Trust (SPY 0.95%) and Vanguard Total Bond Market ETF (BND 0.23%). Basically, the stock market versus the bond market. Notice that the stock market vastly outdistanced the bond market over the period shown. That's not unusual, though the rising interest rate environment over the past year or so has resulted in bonds actually losing money, which isn't as common.
SPY Total Return Price data by YCharts
But what if you bought at a stock market peak? Well, check the graphic closely and you'll see that the chart above begins shortly before the Great Recession when stocks were near their highs. Stocks performed dismally at the start of the period shown while bonds held up relatively well. That explains why having some bonds helps to diversify your portfolio, but also indicates that over long enough periods of time, stocks tend to perform better just the same.
SPY Total Return Price data by YCharts
If you move the start date to just about the bottom of the Great Recession, meanwhile, the outperformance of stocks over time looks even more impressive. Still, buying low or buying high is less important than just buying stocks as you save money on an ongoing basis. (In fact, your ability to save early and often will likely be a bigger predictor of your long-term financial success than any other factor.) The question isn't whether it's safe to invest right now, but can you afford to put the cash into assets that just aren't as profitable over the long term? The answer for most investors is probably going to be no.
Get in the game and stay in the game
Investing isn't easy, and many investors would be just fine buying a balanced mutual fund (which will handle all of the decisions for you, including the bond/stock mix). Just make sure there are some stocks in the mix so you will be positioning yourself to succeed over the long term. This is because stocks offer you the best chance to outpace inflation and grow your wealth. Saving well and thinking long term are the keys, not picking the right second to hit the buy button.
