The news from Wall Street isn’t great. The 6 months through Thursday, June 30 were the stock market’s worst first half of a year since 1970. The S&P 500 is off 21% from a peak last January (a bear market is a 20% drop). Inflation is up. Bonds are suffering too.
Guess what? Opportunity knocks. If you have excess cash, you might consider investing while the market is down.
Here are 12 tips to help you assess whether or not you want to invest right now:
1. Recognize that You Are Not a Fortune Teller
Look, you are not a fortune teller. You don’t have a crystal ball that will tell you when the markets are at their lows. And, you don’t have a time machine that will enable you to go back in time to buy after the lows have passed.
What you should recognize is that you’ll only know that the market bottomed out after it has already happened.
Trying to time the depths of a stock or fund can mean missed opportunities.
2. Understand Your Time Horizon
The stock market goes up and down over different time periods. However, over the long haul, the markets have always trended upward. This means, that it is highly likely, at some point in the future, that the markets will return to where they were last January and surpass those levels.
So, if you have a long time horizon – the amount of time between when you make an investment and when you will want to cash out your investment – then now is a good time to put money to work in the markets.
However, if you anticipate needing the money in a relatively short period of time (less than 5-10 years), then you may not want to risk the funds to the market.
3. Know that the Market May Fall More
There is a lot to unravel in this economy.
What may be useful to know is that according to data from CFRA Research, in all 14 bear markets since 1945, the S&P 500 fell by an average of 32% and took an average of 12 months to find a bottom.
It is also important to note that after all 14 downturns, the markets fully recouped those losses within an average of 23 months.
4. Don’t Try to Time the Bottom, Buy at Regular Intervals
Instead of trying to figure out the best day, week, or month to buy into the market, a better approach may be to dollar cost average your investments: Invest equal sums of money at regular intervals, regardless of the asset price.
Choose a time interval (once a day, week, or month) and invest a portion of your available funds over a period of time.
Your purchases are spread out over a prescribed period of time. You won’t time the bottom perfectly, but will avoid the feelings of regret that occur if you plunge all your money in the day before a big drop.
Dollar-cost averaging is a rational approach designed to help investors avoid making decisions out of greed or fear.
5. Remember that Cash Loses Value When Inflation Rises
As inflation rises, the value of each dollar you own goes down. Your cash loses purchasing power when costs go up.
You can mitigate the effects of inflation on your cash by investing.
6. In the Accumulation Phase? It is Probably Best to Keep Investing
If you are working and saving money and intend to keep working for the next 5 years or more, keep investing (assuming you have an emergency fund to cover 6-months to a year of expenses).
You have the time to make up for any additional losses in the markets. It is almost like stocks are on sale right now. And, if there are additional “markdowns” in the future, you have time to regain those losses before you need to tap into the funds.
7. Understand the Difference Between Excess Cash and Cash Reserves
Excess cash is money that you don’t need for living expenses over the next 3-10 years. (The time horizon depends on your risk tolerance.)
Cash reserves are funds that you want to have on hand. This money is to be tapped for income to cover necessary expenses.
You may want to plunge excess cash into the market. Whereas cash reserves should be kept liquid or invested in ways that guarantee the income you desire.
8. Stick to a Long Term Strategy
Ideally you have an Investment Policy Statement (IPS) to determine your long term investment strategy and what to do in downturns and times of volatility.
Stick to your long term investment strategy.
9. Look to History to Put the Downturn in Context
Again, the stock market has always trended upward over the long haul.
Here are a few other reminders from the history of the stock market that may help you overcome fears of investing when markets are low:
Since 1926, the S&P has finished the calendar year positive 71 years and negative 25 years (up 74% of the time and down 26% of the time).
Over the past century, U.S. stocks have averaged positive returns over one-year, three-year, and five-year periods following a steep decline. A year after the S&P 500 crossed into bear market territory, it rebounded by about 20% on average. And after five years, the S&P 500 averaged over 70%.
Based on historical S&P 500 returns since 1945, Sam Stovall, chief investment strategist for CFRA Research, told Forbes Magazine, “a ‘quick’ descent into a bear market often tends to signal more “shallow” declines ahead rather than “mega-meltdowns”— declines of 40% or more.” (This dissent has happened relatively quickly. The bull market took just 161 calendar days to go from its peak to a 20% decline threshold—compared to an average of 245 days in past bear markets.)
10. Economic Recoveries Can Happen Before Investors Even Realize It
There is a misguided belief among many investors that they will happily jump back into the stock market after a significant downturn has occurred. “Once we get a 20% downturn, I’ll invest,” goes the thinking. “If I see a rebound, I’ll jump in,” some say.
However, the reality is that Instead of feeling encouraged that stocks are a good buy, many investors become more cautious in a down market, fearing they will put money into stocks only to see the market continue to fall. So instead they continue to sit on the sidelines, waiting until things “calm down.”
However, stocks typically soar back upward well before the crisis that provoked the selloff has run its course.
The market recovery from the 2008-09 financial crisis illustrates this vividly. Despite assurances from the pundits that investors should not expect a v-shaped recovery, stocks did exactly that. From the market low in March 2009, the Dow Jones index gained 30% in the span of just three months. By the end of the year it was up more than 60% from its low point.
All of this occurred despite fear continuing to grip the market and the widespread belief that stocks were experiencing a false recovery and would fall below their March lows in short order.
Investors who were still waiting for the “all clear” signal to get back into stocks instead saw stocks leave them in the dust.
11. Run Worst Case Scenarios, Gain Confidence You Can Weather Any Storm
Planning is an activity that helps you adopt the right habits and make the right decisions when the time comes. Maintaining a financial plan is a key activity to help you achieve your goals.
And, part of planning is understanding worst case scenarios and developing strategies for dealing with them. Research has shown this to be a highly effective strategy for achieving goals. In one example, researchers showed that people who built a written plan for painful rehabilitation after a surgery (including developing strategies for dealing with the pain) started walking almost twice as fast and getting out of chairs 3 times as fast as people who did not write down a plan.
The same principles apply to your financial plans. By anticipating a worst case scenario for your rate of return, you will be prepared emotionally and with the right financial strategies to deal with it.
There are various ways that the NewRetirement Planner can help you envision worst case scenarios. You can:
- Review your Monte Carlo analysis.
- Play with different optimistic and pessimistic rates of return on your investments.
- Set one rate of return for a certain time period and then change that rate for future periods.
- For any change, review your Coach alerts and insights analyses to assess the best ways to weather whatever financial storm you are projecting.
Lot in now, run a worst case scenario. It is unlikely to leave you feeling defeated. You will instead feel more confident and prepared.
12. Get Professional Guidance
The right financial advisor can help you with investing during volatile times in a number of different ways. They can:
- Be an impartial and unemotional guide
- Prompt you with strategies like rebalancing, tax loss harvesting, or trading into higher quality investments
- Help you see opportunities to increase lifetime returns
NewRetirement Advisors can collaborate with you and provide strategies to help you achieve your goals. A Certified Financial Planner® is a professional fiduciary. They offer flat fee-only engagements based on your needs. If you think you might benefit from professional financial advice, book a free discovery session today.