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Thanks to the record-high inflationgeopolitical instability and the the first interest rate increases in years, the current market is, quite simply, incredibly volatile. Existing investors are making strategic changes to their portfolios, and new investors aren’t sure what they want at all. But for those lucky enough to have funds available, is now the right time to start?
Here are three reasons to catch up – slowly.
1. Timing the market is better than timing the market
In general, by the time one begins invest is not as impactful as how long one invests. With a sufficiently long time horizon, a well-diversified portfolio, and the compounding power, the volatility of the portfolio usually smooths. This has been proven historically repeatedly regarding the stock market.
By contrast, “timing the market” or waiting for stocks to hit a new low or fall from recent highs so that an investor can snag a bargain is risky. Short-term market behavior tends to be unpredictable, with current trends turning on a dime. Waiting for the “perfect” moment to invest can mean missing out on potential gains.
In other words, for many prospective traders, now is as good a time as any to invest because the markets are down. But exceptions can be for those who need their money quickly, as a short-term decline can wipe out a portfolio overnight. If you are a new investor looking for a long-term “buy and hold” strategy, this is one of the best times to enter the markets and start investing.
2. Downturns leave more room for growth
Many investors see short-term volatility as a risk that negatively impacts their portfolio. In the short term, this is true: volatility often drags down the total value of one’s investments.
That said, one of the primary ways the stock market generates returns is when investors buy low and sell high. And what better way to take advantage of great price differences than to buy when the market swings down? Forget about timing the market – a good strategy for long-term growth is to buy when the market is down.
It might help to look at market volatility as a form of bargain hunting. By buying high-quality investments when they are “on sale,” investors can increase their future profit margins when the market recovers. The trick is to sort the junk from the gems.
Related: How to start investing
3. The market will do it sooner or later
There is no guarantee that any individual security will make a profit. But historically, given enough time and growth in economic activity, the stock market always behaves – eventually.
That said, the time between a crash and recovery varies greatly, and it certainly cannot be predicted when this will happen. As such, pinpointing how long investors have to wait to realize gains is almost impossible.
For example, most stocks took 12 years to recover after the Great Depression. But during the COVID-19 pandemic, many the stocks recovered in just four months. This is a sobering reminder that there is no way to time the cycles of the bull market or its market and that a market recovery can still occur in some of the worst economic conditions.
Start slowly to establish good habits and “feel” the market
So, is now the right time to invest? For investors who are not on the cusp retired, the answer may be yes. Every investor should consider their risk tolerance and time horizon before deciding when and where to invest. Starting slowly can ease new investors into the market without introducing excessive risk.
Beginners can also start with just a dollar cost averaging method, which involves investing small sums at regular intervals to even out the ups and downs of the market. While not as exciting as day trading, dollar cost averaging reduces the temptation to time the market and can also lead to more significant gains for investors.
As scary as the current market may seem, the competent investment is less about the developments of the day and more about the future. Be strategic, stay focused, and only risk what you can afford not to touch the future.