Major stock market indexes continue to find new highs, even as businesses remain shuttered and millions of Americans struggle with unemployment amid Covid-19-related shutdowns. If that has you looking at the recent stock market with skepticism, worried that things may head downhill quickly, you're not alone. Market analysts have warned for months that investors are bidding up stock prices to dangerous levels, an environment that could precede a precipitous drop in the market.
But that doesn't mean you should wait until conditions appear to improve to get started investing. "When markets are going great guns, a lot of younger investors say, 'Well, I don't want to be in right now. Maybe I'll sit on the sidelines,'" says Karen Wallace, director of investor education at Morningstar. "That turns out not to be helpful. In fact, it will hurt your returns in the long run."
Waiting things out tends to be a losing strategy for two reasons: You're sacrificing time your investments could be compounding, and timing the stock market is extremely difficult.
Here's why you should be investing early and often.
Video by Helen Zhao
If you're a young investor, you have time on your side. "If you pay attention to the financial media and headlines, there will always be the next big thing that's going to destroy everything," says Kevin Smith, a certified financial planner and vice president of Wealthspire Advisors in Melbourne Beach, Florida. "But the market is resilient. It will find a way to get through, just like with the dotcom bubble and the global financial crisis. If you're young, remember that you have a long time horizon."
If you have decades for your money to grow, you have plenty of time to withstand whatever dips the market throws at you. But the longer you wait to get in, the more you negate the power of compounding interest.
Consider the following: A 25-year-old contributes $5,000 to her 401(k) plan annually, and her portfolio earns an annualized 8%. If she never changes her contribution, by the time she retires at age 65, her 401(k) would be worth about $1.3 million. If she waited until she was 30 to start, her account would be worth about $565,000.
Still, the goal is to buy low and sell high, right? And if you can buy when the market is at a low, rather than at a peak, you stand to make more money.
True, but figuring out when to get in and out of stocks is tricky. "Timing the market is very difficult," Smith recently told Grow. "You need to be right twice — when you get out and when you get back in."
Video by Stephen Parkhurst
And if you're already out and searching for an entry point, things may head up and up while you wait. "We know a lot of people during the crash of 2008 really actually put a lot of money off the table, and they were looking for opportunities to invest, right? And it just kept on going higher," says Winnie Sun, co-founder of Sun Group Wealth Partners in Irvine, California. "Well now it's five years. Now it's six years. All of a sudden, you're looking at over 10 years that the markets continue to go up."
Case in point: Say you invested in an S&P 500 index fund in on October 9, 2007 – which was the start of a bear market that would see the index decline by nearly 57%. Had you held on until today, your investment would have grown 211%, more than tripling your money.
If you're invested for the long term, there's no telling what stocks will do on a day-to-day or even month-to-month basis. To take the guesswork out of investing, it's smart to follow a strategy known as dollar-cost averaging, by investing a fixed amount into your portfolio at set intervals. You may already be doing this by diverting a portion of your paycheck into a workplace retirement account.
Employing this strategy over long periods ensures that you'll buy more shares when stock prices are down and fewer when they're expensive. "That's how we hedge this notion that we can't time the market," says Doug Boneparth, a CFP and president of Bone Fide Wealth in New York City.
That's not to say that you shouldn't snap up investments when they "go on sale" during a market downturn. Sun recommends setting aside a portion of your savings for this very purpose.
"What you want to do is also keep some money where you can be very strategic," she says. And that's "when you see a dramatic drop in the market. Don't go overboard, but take a percentage of your savings and invest during that point. If it falls again, do that again and continue to repeat."
Grow video producer Helen Zhao contributed to this report.
More from Grow:
- The 5 biggest mistakes investors make and how to avoid them
- ‘Compound interest is the way to get rich,’ says ‘Get Money’ co-host — here’s why
- What bubbles are — and what happens when they pop