It has been almost two years since Covid-19 triggered a stock market crash on March 23, 2020. While the market has mostly recovered since then and even reached record highs, we still have a long way to go before things return to normal. As we grapple with new variants one after another, along with inflation concerns, potential hikes in interest rates, and massive supply chain disruptions, many investors have become wary of investing in the stock market.
Amid economic uncertainty and stock market volatility, you may get tempted to sit out and try to time the market for the perfect buying opportunities. But, unless you have exceptional circumstances such as high-interest debt, or a time machine to see the future, you should probably continue to invest in the stock market. And if you are not investing, we recommend getting started as soon as possible to set yourself up for long-term financial success.
If you are still not convinced, we will go over a few reasons why you should invest in the stock market now and the types of stock you can buy to grow your wealth.
- Do not let negative emotions, such as fear and stress, prevent you from investing in the stock market. Waiting on the sidelines because you are afraid of a market correction will ultimately hurt your long-term investment performance.
- There are many benefits to investing in stocks now, such as building wealth and reducing your taxable income.
- Before you make any investment decisions, create a solid investment plan. That includes things like setting financial goals, conducting due diligence, and diversifying your portfolio.
- Make sure to tackle high-interest debt and build up an emergency fund before investing in stocks. If money is tight, focus on one thing at a time.
6 Reasons to Invest in Stocks Now
As Warren Buffett famously said, investors should be “fearful when others are greedy, and greedy when others are fearful.” Even though it seems like the pandemic will never end, do not let fear of a market correction keep you out of the markets. You never know when the market will reach new highs, and when that happens, you certainly do not want to miss out. So, let’s take a look at a few reasons why you should invest in stocks now.
1. Your Money Will Grow Over Time
If you invested $10,000 in an S&P 500 index fund (The S&P 500 is a stock market index of 500 of the largest companies listed on stock exchanges in the United States) 10 years ago, your portfolio would now be worth $37,515. That is a nearly 4x increase from doing nothing after making your initial investment! On the other hand, if you stashed the $10,000 under your mattress instead, your money would be worth less than $10,000 today after factoring in inflation.
Looking at historical returns of the S&P 500, your stocks should grow in value by an average of 7% annually. So, the longer you stay invested, the greater your odds of getting positive returns.
According to Nutmeg’s analysis of global stock market data from January 1971 to December 2021, holding your stocks for one day has the same odds of profitability as flipping a coin. In comparison, holding them for a quarter (~65 days) increases your odds to nearly 2/3rds, holding for a year is up to 82%, and holding for a decade is up to 94.15%! The longer your time horizon, the more likely your money will compound and grow in value exponentially – unlocking the true benefits of investing in the stock market.
Note that these stats do not necessarily guarantee profits over time. If the companies or underlying assets you are investing in do not have solid business fundamentals or value propositions, their prices may stagnate or decline in the long run.
2. Inflation is Killing Your Purchasing Power
Have your parents ever complained about how cheap things used to be? $0.25 for a cup of coffee? $1 for a movie ticket? Part of the reason things cost more today than for previous generations is a result of inflation. And inflation is an unavoidable factor in our economy it eats away at the value of your money over time. Using an inflation calculator, we can see that $10,000 in 2011 would only be worth $8,380 in 2021.
When we observe inflation rates more closely between 2011 to 2021, we can see that inflation skyrocketed in 2021 its highest in 40 years! You probably have already noticed your purchasing power decrease with the cost of everything from gas, food, housing, cars, apparel, airline fares, etc., rising significantly in the last few months.
With prices of goods and services rising dramatically, it is no wonder why many investors are nervous about the state of the economy. Still, that is no reason to overreact or make short-term decisions that might hurt your financial future. If you are a regular investor like me and still employed, the best course of action is to keep doing what you are doing and stay invested. That means continuing to dollar cost average into stocks and working toward your financial goals. After all, life still goes on despite inflation.
If inflation is causing you significant financial stress or anxiety, consider seeking help from a financial advisor or financial planner. Ask questions about your cash flow, retirement plan, equity assets, emergency fund, etc. Their primary responsibilities are to mitigate stress and anxiety during periods of uncertainty, so having an open dialogue about your worries can help you feel more in control despite what is happening in the stock market.
3. Save for Larger Purchases
If you plan on purchasing a home or saving for retirement, one of the best ways to save up for these loftier financial goals is to invest your money in assets that grow in value over time. Each year you let your money sit on the sidelines is another year of inflation eating away at your purchasing power and net worth.
For example, if you want to buy a home, you typically need at least 10-20% of the purchase price for your downpayment. Your lender may let you put down as little as 3.5%, but that means large monthly payments that might not feasible given your current financial situation.
As such, your goal for a $600,000 home should be at least $60,000 saved. If you save $500 a month by depositing that money in your checking account, it would take you ten years to reach that amount. On the other hand, if you invest $500 a month into an index fund like VOO or SPY, it would take just seven years cutting your time down significantly.
4. If You Have a 401(k), You are Probably Already Investing in the Markets
Do you have a 401(k) plan from work? Maybe your company’s HR team advises you to allocate 5-10% of your pre-tax income to your 401(k). Starting this year, my company automatically enrolls everyone in a 401(k) and allocates 5% of our income towards the plan by default.
When you log into your 401(k) plan, you will likely pick a target retirement fund (like the Vanguard Target Retirement 2060 fund) and call it a day. If you look on Vanguard’s website, you will note this retirement fund is a combination of stocks and bonds. So if you and everyone else with a 401k plan is already investing, there must be a good reason why.
With 401(k)s, the rule of thumb is to invest at least enough to get your company 401(k) match. Depending on your organization’s 401(k) program, your employer may wholly or partially match your contributions up to a certain percentage. Even if your investments do not grow in value over time (which is unlikely), the match is free money straight to your retirement plan. So, if you opt out, you are essentially leaving money on the table.
Currently, I allocated 40% of my investments in my 401(k) to the Fidelity 500 Index Fund (FXAIX) and 60% to the Fidelity Mid Cap Index Fund (FSMDX). While my employer does not offer any matching contributions, I still contributed 5% of my paychecks in 2021, and for 2022, I have upped my contributions to 10%.
5. You Can Reduce Your Taxable Income
While taxes are needed for the government to run properly, nobody likes seeing their hard-earned money go straight to taxes. I don’t like taxes. You don’t like taxes. Donald Trump has shown he really doesn’t like taxes. If you invest your money in a tax-advantaged account, such as a 401(k) or a Roth IRA (Individual Retirement Account), you can reduce your taxable income and give less money to Uncle Sam.
With a 401(k), you invest using pre-tax dollars, which decreases your upfront taxes. You can contribute up to $20,500 into your 401(k) for 2022, up from $19,500 in 2021. With a Roth IRA, you invest using post-tax dollars, but your capital gains will not get taxed in the future. If you are younger than 50 years old, you can invest up to $6,000 for 2022. If you are age 50 or over, you can invest up to $7,000. Note that there are limitations for contributions based on your filing status and income by the IRS.
6. Stock Market Volatility is Unavoidable
If you are scared of investing or considering selling your stocks, it is likely because you are afraid of volatility. That concern is certainly justifiable, with the stock market fluctuating daily. However, letting fear dictate your investment decisions is not a good idea. Instead, we need to recognize that market volatility is an inevitable part of the markets and seek to understand its consequences.
The stock market goes through bear cycles and bull cycles. So, sometimes the market will drop, while other times, it will reach new highs. The minute you decide to participate in the stock market, you sign up for the good times and the bad times. Sounds cheesy, we know. But, unfortunately, there is no guaranteed strategy to avoid a financial crisis or market downturn.
On the bright side, while the market does go through periods of downturns, the long-term trend is upward. For example, despite the stock market crash resulting from coronavirus, the market largely recovered less than half a year later despite Covid-19 persisting.
If you want to invest successfully and build wealth, you need to keep volatility in mind. Despite booms and busts, the average annual return of the markets is roughly 7-10%. If you feel like it’s the end of the world, then you are probably overreacting to short-term trends and need to take a step back from checking your stocks too often.
Types of Stocks to Buy
Depending on your financial circumstances and risk tolerance, there are many different types of stocks you can invest in. Below are some of the more popular options among investors.
Apple, Microsoft, Google, Tesla, Netflix. These are just a few household names that you have probably heard of and would not mind investing your money into. You look up the price of one Google share, and you fall out of your seat. It costs almost $3,000. How can you afford that? Luckily, there is a way for you to own a piece of all the corporations we mentioned above.
The stock market can be volatile, but an easy way to minimize some of these risks is to invest in index funds. An index fund is a type of mutual fund or exchange-traded fund (ETF) with holdings that attempt to match the components of a financial market index, such as the S&P 500. For example, BlackRock’s iShares Core S&P 500 ETF (IVV) and Vanguard’s S&P ETF (VOO) attempt to mirror the S&P 500 and have holdings in FAANG and other major US companies.
If you are a passive investor with a long-term time horizon, putting your money in index funds is a safe bet. Warren Buffett recommends investing in index funds for the average investor rather than handpicking stocks. But, before you invest in a fund, look into its benchmark, expense ratio, and performance over time.
Different index funds will track various assets based on geography, company size and capitalization, specific sectors or industries, asset type, or market opportunities. There are many different types of funds you can invest your cash toward depending on your personal interests and risk tolerance. For example, if you are interested in momentum plays, you can look into the iShares MSCI USA Momentum Factor ETF (MTUM). If you are interested in dividend stocks, look into Schwab’s US Dividend Equity ETF (SCHD) or the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD).
An index fund’s expense ratio is the fee you incur by investing in it. Knowing the expense ratio will help you better weigh the benefits and costs of different funds. Examples of investor-friendly funds include Fidelity’s ZERO Large Cap Index (FNILX) and Vanguard’s Total Stock Market Index Fund (VTSAX). Currently, FNILX has an expense ratio of 0%, meaning that for every $10,000 you invest in the index fund, it costs you $0 annually. On the other hand, VTSAX has an expense ratio of 0.04%.
Checking how the index fund historically performed compared to similar index funds and the broader market is crucial for growing your money. If your goal is to attain growth relative to the S&P 500, you should consider investing in index funds that perform at the same levels as the S&P 500. If you are looking for high growth, consider investing in index funds that have outperformed the market in the last few years. Nobody likes losing money, so make sure to check if the index fund is performing to your standards.
Blue-chip stocks are large, financially sound companies with excellent reputations. These are typically well-established and nationally-recognized businesses that have operated for a long time. Most have market capitalizations in the billions and are the market leaders in their industry or sector. Examples of notable blue-chip stocks include Apple, Microsoft, IBM, and J.P. Morgan Chase.
Investors usually turn to blue-chip stocks because they have long track records of stable growth and dependable financials. Many also have a history of steady or rising dividends payouts, which investors receive on a consistent basis.
While blue-chips are often perceived as safe investments that can withstand any financial crisis, that does not mean they are immune to extreme stresses. During the 2008 Great Recession, the Lehman Brothers and other high-profile corporations filed bankruptcies, causing blue-chip stocks to tumble. So, it is crucial to diversify your holdings across different types of stocks or assets.
Many investors typically allocate money to other types of stocks, bonds, cash, commodities, real estate, crypto, etc. For example, younger investors may devote more of their portfolios to riskier assets such as mid-caps, small-caps, and crypto to grow their wealth. Meanwhile, older investors may focus on wealth preservation through bonds and cash.
Many corporations share profits with their shareholders on a quarterly or annual basis through dividends. You can invest in dividend stocks by purchasing shares in individual businesses that pay dividends, such as Costco, Citigroup, AbbVie, and Kimberly Clark. Alternatively, you can invest in dividend funds, such as the Schwab US Dividend Equity ETF (SCHD) or SPDR S&P Dividend ETF (SDY). As long as they pay dividends, you will receive a fixed payment for each share you own. Note that the dividend payout rate varies each year or at a company’s discretion.
When deciding which securities to invest in, look for high-quality dividend stocks. For example, the Dividend Aristocrats are S&P 500 companies with 25+ years of consecutive dividend increases and meet size minimums and liquidity requirements. They are proven and reputable corporations with a strong history of rewarding investors with stable or rising dividends.
Investors seeking passive income or stability tend to invest in dividend stocks because they usually outperform the S&P 500 during recessions and exhibit lower risk, making them a low-risk, high-reward investment. Examples of such businesses include Microsoft, American Express, Becton, Dickinson & Company, AT&T, and Target.
Tips and Tricks to Consider
Investing requires planning and strategy. So, it is crucial to create an investment strategy tailored to your personal circumstances.
Set Financial Goals
For many adults, personal finance can be a source of stress and anxiety. Our relationship to money often gets shaped by our goals and our understanding of how money and investing enable us to reach our goals.
Think about what you hope to accomplish by investing in the stock market. What are your short-term, medium-term, and long-term goals? Are you planning a vacation? Starting a new business? Saving for a home downpayment? For retirement? Once you understand what you want your financial future to look like, that will start shaping the way you invest and your long-term investment strategy.
If you have a short timeframe for your goals or plan on retiring soon, then it may not be the best idea to invest in highly volatile stocks. On the other hand, if you are years or decades away from retiring, you have more opportunities to take on more risks and recover from mistakes.
Understand Your Risk Tolerance
Tying into your financial goals, your risk tolerance will dictate the types of investments you end up putting your money toward. Think of your risk tolerance as your risk-to-reward ratio. How much risk are you willing to take on for x percentage returns in your portfolio? Generally, the higher the rewards, the higher the risks.
If you are the type to panic when the market is not doing well, then you probably should not invest in assets with high volatility, such as growth stocks. Instead, your best bet is to stick to index funds or blue-chip stocks. If you handle volatility well and will sit tight even when it seems like it’s the end of the world in the markets, then you have a relatively high risk tolerance. In that case, you may be better served to invest in growth stocks or handpick individual stocks.
Conduct Due Diligence
The easiest way to lose money is to invest in things you do not understand. We recommend doing some research into stocks you are interested in before investing. Two popular methods for market research that many investors and traders use today are fundamental and technical analysis.
Fundamental analysts attempt to evaluate a public company’s intrinsic using various data such as earnings reports, financial statements, company leadership, and economic and industry conditions. The goal is to glean insights into the company’s growth potential and underlying value. Investors typically use fundamental analysis to make long-term investments, although short-term traders may also use it to boost returns.
Unlike fundamental analysis, technical analysis focuses on statistical trends. Technical analysts assume that a stock’s intrinsic value has already gotten priced in, so there is no need to look at the fundamentals. Instead, they use past price movement and trading volume of stocks to identify patterns and trends.
Popular signals that technical analysts use to determine when to buy or sell stocks include support and resistance levels, candlesticks, MACD, moving average crossovers, and VWAP. These tools can help investors and traders determine how a stock will act in the future. The goal is to forecast a stock’s future market price and set up strategies around your predictions. Typically, technical analysis gets used by short-term traders who are looking for quick profits. The style can get applied to many forms of high-speed trading beyond stocks, such as forex and options trading.
Diversify Your Investments
Between Covid-19, rising inflation, pricey real estate, and everything else going on in the world, it is hard to tell which asset classes will continue to perform well in the future. That is where diversification comes in.
Diversification involves diversifying within asset classes and among different assets. If you are investing in stocks, you could diversify your holdings by investing in two or three different types of index funds. Alternatively, you can invest in a mix of blue-chip stocks, value stocks, and growth stocks. In addition to stocks, you could also invest in real estate, bonds, crypto, art, etc. to diversify into different asset classes.
By investing in a wide range of securities, you spread your risk across various investments and ensure that you do not overinvest in any single asset. That way, when something goes wrong with one asset class, your other holdings will help keep your portfolio from crashing and burning.
Buy and Hold
Going back to the statistic we threw out earlier about your probability of positive returns over time, buying and holding is one of the best strategies for growing your wealth. Depending on your financial goals, that could mean holding your investments for years or decades.
If you buy and hold, you believe that the value of your securities will grow over time with the market and lead to greater returns. If nothing has fundamentally changed about your investments, any short-term fluctuations should not impact your positions.
The buy and hold strategy is best for passive investors who believe that “time in the market is better than timing the market.” Using this method, you would consistently use dollar-cost averaging regardless of what is happening in the markets.
Dollar-Cost Averaging (DCA)
With dollar-cost averaging, you would invest your money equally across regular intervals to reduce the effects of volatility on your portfolio. Rather than trying to time your investments, DCA focuses on consistently investing regardless of how the market is doing. This strategy lets you take the guesswork out of investing and simplify your investment process.
One way to do this is to automatically invest a percentage of your paychecks every month in your 401(k) or Roth IRA. Currently, I allocate 10% of my paychecks towards my 401(k). The money gets directly invested in a couple of Fidelity index funds, and that’s it.
Research has shown that market timing and predicting what will happen to the markets in the future is difficult. Most people have no idea what will happen, myself included. If you anticipate a market crash and decide to sit out to wait for opportunities to swoop, you could miss out on the biggest bull run of your life.
When to Hold Off on Investing in Stocks
At the very least, before investing in stocks, you want to make sure you have no reoccurring high-interest debt and you have an emergency fund. Your financial plan should always cover any glaring holes in your current finances first.
Debt has a bad reputation, but there is a difference between good debt and bad debt. Good debt enables you to generate income or increase your net worth. For example, things like purchasing a house or taking out a loan for a business are usually considered good debt. Bad debt is debt that gets used for depreciating assets or consumption. That includes expensive cars, luxury goods, and credit card debt.
If you have ever forgotten to pay a credit card bill on time or missed a payment, you probably got hit with a nasty fee. I missed my payment deadline for one of my credit cards one time, got charged $25, and have never missed a due date since. In addition to fees for late payments, many credit cards have a large APR (annual percentage rate) some are over 30%!
If you have racked up a good amount of credit card debt or other high-interest debt, pay that off first before investing in the stock market. Every month that you carry a balance over, the more interest you will accrue over time. That can create a snowball effect, especially if your lenders charge high interest rates. While not impossible, it is unlikely that you will achieve over 20% annual returns in the stock market to equal or compensate for the interest on the debt.
An emergency fund is money you set aside for unplanned expenses, such as losing a job or an unexpected medical cost. Using rainy day funds to cover unexpected costs is better than paying with high-interest credit cards or taking out a loan. Typically, an emergency fund should be big enough to cover three to six months of expenses, though some people prefer to have six to twelve months of expenses set aside.
When calculating how much you spend every month, factor in all the costs, not just your rent. Car payments, student loans, groceries, utilities, and subscriptions may all be monthly costs you are obligated to pay. Once you have that emergency fund accumulated, keep it in a high-yield savings account, such as HM Bradley or Ally Bank. The last thing you want is to get forced to sell your stocks to cover an unexpected expense when the market is down.
Brokerages to Consider
There are many brokerages you can choose from to start investing in stocks. More established brokerages include Fidelity, Charles Schwab, TD Ameritrade, and Vanguard. Brokerages with more user-friendly UIs include Robinhood, Public, and M1 Finance.
Personally, I have tried out Fidelity, TD Ameritrade, Robinhood, Webull, and SoFi. For my individual brokerage account, I use Webull extensively. For my Roth IRA, I use Fidelity. What you decide to use ultimately decides on your personal preferences.
The Bottom Line
If you do not have any extenuating circumstances preventing you from investing, then yes, you should invest in stocks now. While we cannot guarantee that a stock market correction will not happen in the near future, you are better off putting your money to work than letting it lose value to inflation.
Some investors try to time the market by attempting to buy low and sell high based on price action in the stock market. But, this strategy is pretty much just gambling and time-consuming. Even experienced investors cannot always accurately predict when a stock’s share price will go up or down. So, for that reason, most investors will not bother timing the market and choose to buy and hold instead.
Once you have an investment strategy mapped out based on your risk tolerance, personal circumstances, and financial goals, it is best to stick to your plan. If you have a long time horizon and diamond hands on your strongest conviction stocks and funds, then you do not have anything to worry about. You could just sit back and let your money run.