Is Now a Good Time to Invest?
It’s always intimidating to start investing if you’ve never done it before. This is especially true in today’s economic climate. In 2021, the stock market boomed by over 20%. But now? There is record inflation, a land war in Europe, and the market is down 20%. For this reason, many first-time investors are asking a difficult question: Is now a good time to invest?
Is Now a Good Time to Invest?
The simple answer is, yes. As long as you invest your money intelligently then there is no reason why today isn’t a good time to invest. This might seem like an interesting take, given that the S&P 500 is down 20% so far this year. Let me explain a little bit further.
What would you do if you walked into the grocery store and saw that they were having a huge sale on expensive meat? Ribeye’s and filet mignon cuts were going for 30%, 40%, and even 50% off. Chances are you’d end up buying a lot more meat than you anticipated. You might even buy more meat than you can realistically eat this week. But that’s okay. You can always just freeze the meat and eat it in the future. After all, you should take advantage of the incredible savings! Interestingly, the same theory applies to the stock market.
From now on, when the stock market declines, think of it the same way as a grocery store sale. A 20% YTD stock market decline just means that you can buy shares in the S&P 500 for 20% less than you could at the beginning of the year. Historically, the stock market always recovers after a decline. There is just no telling how long this could take to happen. After the 2020 market decline, it took a few months to recover. In 2008, it took a few years.
However, at some point, the market should return to its all-time high. Then it will surpass that high and reach another. And another. The key is to buy when the market is at its lowest and then enjoy the ride up. Too many times, people buy when the market is at its highest. By buying when the market is lower you are maximizing your potential for a higher return.
With that said, there are two things to keep in mind when asking yourself if now is a good time to invest.
Invest With Money That You Don’t Need
In our grocery store example, we had to freeze the ribeye steaks that we bought so that they didn’t go bad. In other words, we made an upfront cash investment but had to wait to enjoy the benefit. The same is true for stocks.
When you invest in the stock market there is no telling how long it might take to increase in value. Most likely, it will have up days and down days in the short term. But, over the long term, it will trend up and to the right. The key is to have patience and let the market grow.
For this reason, you must be prepared to wait in order to reap the benefit of your cash investment. You should only ever invest money that you won’t need right away. So, once you have made this mental adjustment, what should you actually buy?
Buying Safe Assets
To be clear, the assumption that the market always increases over time applies to the overall market. Not individual stocks. Even the largest companies have the potential to go bankrupt. This is why so many investors recommend buying index funds that track the S&P 500. By doing so, you are investing in the collective returns of America’s 500 strongest companies. You are essentially investing in the strength of the American business sector. This has a much better chance of success than any one particular company.
This section on buying safe assets could really span its own article. This is because the appropriate investment advice will depend on your personal risk tolerance and financial goals. It’s possible that buying index funds is not the best strategy for you. This is just the most common starting point. If you need to, be sure to talk to a financial advisor. They will be able to help you accurately determine the best place to invest your money.
Speaking of risk tolerances, when asking “is now a good time to invest?” we also need to understand the risks. In today’s economic climate, there are plenty of those.
A risk factor is anything that can negatively impact the stock market. It could be something like a war or a new piece of legislation. For example, COVID-19 was the biggest risk factor over the past two years. The virus was unpredictable and nobody knew what kind of impact it would have on different companies.
Today, the worst of the virus is behind us. But, there are still several new risk factors.
Record High Inflation
To start, the United States is experiencing its highest inflation since the 1980s. In June 2022, the inflation rate was 9.1%. This is one of the biggest threats to the stock market right now.
The inflation rate is the amount at which the dollar devalues each year. At an inflation rate of 9.1%, a savings account with $10,000 will only be worth $9,090 by next year. As consumers, we experience inflation via higher prices. If you’ve ever found yourself exclaiming how expensive a certain product has gotten, there’s a good chance that inflation played a role.
Inflation is a risk to the stock market due to its impact on companies. There are many different ways that companies could suffer from the effects of inflation. Some companies, like retailers, are hit hard. Other companies, like software companies, are not impacted as much.
Inflation also affects consumer spending and confidence. In general, it creates a lot of uncertainty, which makes investors nervous.
The war between Russia and Ukraine is still raging on. This war is wreaking havoc on global supply chains and cutting off critical natural resources. The impact of this war is still playing out. But, it will most certainly negatively impact many U.S. companies. There are many examples of ways that this war has already damaged the U.S. economy.
These two factors, along with others, are stoking fears of a potential recession in the U.S. This is part of the reason that the stock market is down 20% so far this year.
So, is now a good time to invest? I still say yes.
The Timing Will Never Be Perfect
At this time two years ago, the world was ending. COVID-19 was causing incalculable harm to our society. Hospitals were becoming overfilled. Major sports leagues were shutting down and people were being forced to quarantine. At the time, there was no vaccine and now telling how many people would die. It seemed like the worst time ever to invest in the stock market.
Last year, the COVID-19 delta variant was threatening another shutdown. On top of that, global supply chains were in disarray. There also was a massive computer chip shortage which led to shortages of other products. It was hardly the perfect time to be investing.
Then, in February 2022, Russia invaded Ukraine. This created Europe’s largest refugee crisis since World War II. A few months later, we are facing the highest inflation rates in 40 years. Surely, this is a terrible time to invest.
It always seems like an awful time to invest. But, despite these turbulent years, the stock market is still up 50% over the past five years. Now, this does not guarantee another 50% return over the next five years. But, my point is that there are always dozens of reasons not to invest. There is always another disaster around the corner.
All in all, the stock market tends to ignore these disasters. In hindsight, things were almost never as bad as they seemed at the time. This is why, over the long run, the good years in the stock market far outnumber the bad ones.
I hope that you’ve found this article on is now a good time to invest to be valuable! Please remember that I’m not a financial advisor and am just offering my own research and commentary. As usual, please base all investment decisions on your own due diligence.
About Teddy Stavetski
A University of Miami grad, Teddy studied marketing and finance while also playing four years on the football team. He’s always had a passion for business and used his experience from a few personal projects to become one of the top-rated business writers on Fiverr.com. When he’s not hammering words onto paper, you can find him hammering notes on the piano or traveling to some place random.