As of the writing of this blog post, the stock market is on an upward trajectory. It’s been robust lately and has seen some all-time highs this year (but to be fair, 7% of ALL trading days are all-time highs). There have been some fluctuations in the market recently, but it has mostly held its steady, upward climb.
Is NOW a good time to invest?
The short answer is YES.
The slightly longer answer is: ANY time is a good time to invest.
Let me explain:
A lot of people try to time the stock market in order to capitalize on the highs and lows. The basic method is: buy low, sell high. However, most people are terrible at predicting what the stock market is going to do. Unless you have a crystal ball, timing the stock market is pure speculation. It’s much better to make an investment at any time (even when the stock market hits a peak) and let your money stay put for the long term.
This style of investing is not glamorous, but it works. I like to compare it to running a farm. When you plant a field of corn, the yield is not immediate. You have to plant the seed, fertilize the soil, and give it plenty of water and exposure to sunlight. Then, you wait. And wait. If you’re patient and don’t yank the corn out of the soil before it has matured, you’ll get a nice yield.
The same is true with the stock market. It’s a waiting game. It’s much more likely to pay off for you if you think about it as a place to nurture long-term investments, instead of quick, in-and-out gambles. You wouldn’t sell your home as soon as the real estate market turned in your favor, would you? You wouldn’t uproot your family and chase the real estate market across the country. It’s better to just sit tight and ride out the market's peaks and valleys.
To demonstrate the reliability of stock market growth (compared to the reliability of individual investors), we simply have to look at the annualized rate of return of stocks and bonds over the past two decades.
Between the years 1996 and 2015:
- The S&P 500 grew by 8.2%.
- A mix of 60% stocks and 40% bonds grew by 7.2%.
- A mix of 40% stocks and 60% bonds grew by 6.7%.
- Inflation was 2.2%.
- The average investor’s return was only 2.1%!
To put it another way, if you would have invested $10,000 in 1996 in a 40/60 mix of stocks and bonds and simply left it alone until 2015, you would have about $34,300. If you were the average investor (who moves money in and out of the market at their whim), you wouldn’t have even kept pace with the rate of inflation!
NOTE: This time period included the Dot Com crash and the 2008 recession. People who sat tight still ended up ahead!
What does this tell us? People are emotional beings and we often make mistakes. We hear about the success stories of investors who played the market and came out ahead and we try to emulate them. A few of us may get lucky, but most (as demonstrated by the statistics) will not.
That’s why it’s better to think about investing like farming. Be patient with your seeds. Leave them alone. They will grow over time if you let them.