Is now the right time to get into the stock market? The answer to that query is often necessarily multifaceted. In determining your investment strategy, whether this is the right time to invest isn’t the most important thing to ask. The more significant questions are:
1. What is my risk tolerance, or, how much money am I willing to lose for a chance to obtain a higher rate of return?
2. What is my time horizon for this investment? Can the funds be invested for 10 to 20 years without needing to utilize them?
3. What is my objective for the money? Will I need it in three years, or will it become part of my estate in 20 years?
Once you establish answers to these questions, you have formed the basis to determine what percentage of your investment portfolio belongs in the stock market. Generally most people should have between one-third and two-thirds of their investments in stocks.
Now that you have determined how much of your money should be in stocks, we revisit the initial question of when to invest. My recommendation is to start as soon as you finish reading this article. Of course there are strategies such as dollar cost averaging, but for the long-term investor, get your stock market money working right away. Is this a bad time to invest? That’s not easy to determine. The market recently rallied 20 percent in just four months. Also, plenty of people have been waiting five years to get into the stock market because of its high level. Furthermore, over a 30-year period the stock market has returned nearly 12 percent a year; if you missed the best 90 days of that 30-year period, your return would have been just 3 percent rather than 12 percent. Is there someone out there who knows which three days per year the market will rally the most? If so, please give me a call; I’d love to chat. One other interesting statistic is that since the bull market began in 1982, if you had put money into the stock market once per year on the worst day (market peak), your return would only be about 1 percent less than the overall market returns.
The most important advice I can impart is that once you establish answers to the questions in the first paragraph, don’t try to time the stock market. It sounds very appealing to listen to the so-called experts telling you how to avoid the catastrophic downturns in the markets, or that this is a once-in-a-lifetime opportunity to jump in, but just think of all that as background noise. It has the same relevance to you as listening to that elevator music going up to the fourth floor. Just get invested, stay invested, and do it now.