Is this the right time to invest in the stock market? The answer is yes—it’s always a ‘yes’. And I am not being facetious!
The best time to invest in stocks is … when you have money to invest. Of course, some cash saving is required for near-term needs. But if you have money that doesn’t need to be spent in the next five years, you can start investing today. Given that we are long-term investors, time is our friend. We want as much time as possible to compound our savings.
Staying on the sidelines and worrying about what will happen next to the market is a futile exercise. We can’t predict the market’s short-term moves but we know how it behaves over the long term.
“But what if the market drops just after I bought stocks?”
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, you should be happy when the market goes down. Your next investing installment will buy you 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 have to 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 installments no faster than twice the rate at which you saved, or
- Spread investments over five years at least – but do it consistently without any midcourse corrections. Don’t get affected by the prevailing mood of the market.
My dry powder purchases this month:
I have a dry powder strategy for my investing. I stay fully invested throughout the market ups and downs except that I keep about 10% of my portfolio in cash. This is my dry powder that I invest when the market drops below certain levels. You can see my dry powder rulebook here. As I was preparing for this column, the US stock market dropped again yesterday—breaking the 10% barrier. The S&P 500 was down 10% from its peak; NASDAQ by more than 12%. As a result, I deployed 10% of my dry powder cash and bought additional shares of Amazon, Alphabet, Facebook, and Microsoft in equal dollar amounts. These are not my first purchases—I own Amazon since 2000, Facebook since its IPO, Microsoft and Alphabet since 2007 and 2014 respectively. I continue to like future prospects of all four and continue to build my stake whenever they go on sale. I’ve previously written about my Amazon investment here and here. I also wrote about Facebook here. I haven’t written about Microsoft or Alphabet before, but you can see all my stock holdings here. Why all tech companies? It’s because technology shares are down the most so far in this market correction.
This was the second time this year that the stock market went down by more than 10%. Last time in February, the market dropped by about 14% before fully recovering. I was able to use my dry powder back then to purchase shares. See my 1Q 2018 portfolio update for details.
As I have written before, I make no attempts in predicting where the market will go next. I don’t know if the market will recover from here or go down even further. If it goes down further, I will have a chance to use up more of my dry powder and scoop up new shares at even cheaper prices. If it turns around and recovers to previous highs, I will then replenish my dry powder cash (by selling some stocks) and wait for the next market decline.
A side benefit of this ‘staying agnostic about the market direction’ mindset is that I can afford to be blissfully ignorant. I could go right past media headlines pronouncing expert opinions without pausing. It saves me time and energy that I’d rather spend on researching new investment prospects. As I wrote in a blog post, I don’t take investing advice from people I don’t know.