Let’s say you have some cash you want to invest for the long term. You know how important it is to get that money in the market so it can grow and earn compound returns — but when do you invest it?
The answer lies in this fact: It’s about time in the market, not market timing.
This is true even if you’re in your 40s or 50s right now and feel like you need to start carefully minding your investments for retirement. Keep in mind that if you’re 40-something right now, you likely have over 40 years’ worth of life to enjoy and fund — so the cash you could put in the market now certainly counts as “long term.”
A lot of people are afraid of accidentally buying in at the height of the market, though. They say, “We should hold off until the market dips — because it’s going to dip. It’s the longest bull market we’ve ever seen; it’s been going up for so long. People are even talking about recessions in 2019 … so we should just wait.”
I don’t agree with this sentiment. The fear is driven by a false and ludicrous belief that one can predict and time the perfect entry point into the market. Nobody on earth can do this with any consistent predictability. Your reason for waiting is not a valid reason at all.
The other common objection we hear is what if the market drops just after I bought stocks?
Investing through a Downturn
Most people who start saving early in life shouldn’t struggle with this question. Why? Because they don’t have a large pile of cash sitting on sidelines waiting for the market to go down. If you are investing drip by drip, through an automatic monthly debit contribution, you should be happy when the market goes down. Your next investing instalment will buy you a greater share of some company.
We should also understand why this question is often asked. What happens when we buy some stocks and they go down immediately thereafter. We feel regret. And regret is a powerful emotion that we humans like to avoid. Unfortunately for us investors, there is no avoiding regret. It comes with the territory. We just must learn to embrace the market volatility and live with occasional regret.
If you are a beginner investor who is looking to invest monthly/quarterly savings, your time to start investing is now. Don’t wait for better times to invest. If you have multiple years’ worth of cash saving sitting on sidelines (or just received a large inheritance), do one of the following:
- Invest in instalments no faster than twice the rate at which you saved, or
- Spread investments over five years at least – but do it consistently without any hesitation or corrections. Don’t get affected by the prevailing mood of the market.
By following this approach, you average out the effects of volatility. It’s the investment equivalent of testing the waters one toe at a time.
Investing is Long-Term
The longer you have to amass your cash, the greater risk you can accept, since you’ll have more time to wait out periods of bad returns.
If you need the money within the next five years, you’ll want to avoid individual stocks and stock-centric funds. If you need the money within the next three years, you should also avoid bond funds and real estate investment trusts (REITs), which can drop if interest rates increase.
With those options eliminated, for durations of less than three years, put your money in a money market fund, or using a savings account. Each vehicle generates income while guaranteeing the return of your principal. The sooner you need the money, the less you can afford to lose, right?
On the other hand, stocks are a very attractive option for long-term goals like retirement. The higher potential returns are simply too good to pass up.
Make Retirement your Priority
It might seem backwards to worry about the last money you’ll need before you think about meeting any other financial goals. But because compounding is so powerful, starting early gives you more flexibility later in life. Don’t wait to invest, make it a habit.