In a Year of Uncertainty, Should You Still Buy Stocks?
Tens of thousands of people turn to Google every month to see if now is the time to invest. It’s a loaded question, especially this year: In late February 2020, the S&P 500 began a monthlong decline, finding what investors hope was the pandemic floor on March 23.
Historically, it has taken an average of about two years for the market to recover from a crash; this time, it bounced back in just 149 days. By the end of August, the index was once again hitting record highs.
Stranger still, this unprecedented recovery came amid dour headlines, with U.S. unemployment hitting an all-time high in April and remaining above 10% through July.
Between the stock market’s erratic behavior and economic uncertainty across the globe, investors are understandably wary. But that shouldn’t mean sitting out of the market.
Understanding the Main Street-Wall Street disparity
The market’s recovery is clearly at odds with the U.S. economy. But a closer look shows this imbalance may not be as perplexing as it seems.
The stock market reflects investor sentiment about the future, not what’s happening right now. While retail investors may be more inclined to buy and sell based on daily headlines, institutional investors are looking far ahead. And given the rapid market recovery (and the expectation of continued help from the Federal Reserve), it appears Wall Street isn’t spooked.
The S&P 500 is also market cap-weighted, meaning larger companies will have a bigger impact on its performance (see how the S&P 500 works to learn more about this). The five largest companies in the index (Apple, Microsoft, Amazon, Facebook and Google’s parent company Alphabet) are in tech, an industry that hasn’t been hit as hard by COVID-19. The tech-driven recovery helped push the S&P 500 to its record high, despite the ongoing economic issues caused by the pandemic.
And then there are the high hopes for an eventual vaccine. According to Robert M. Wyrick Jr., managing member and chief investment officer of Post Oak Private Wealth Advisors in Houston, investors may be betting on the belief that a coronavirus vaccine will be produced sooner rather than later. If and when a viable vaccine is broadly available, it’s likely to be a big driver of continued growth in the markets.
“While this is likely already priced into the market to some degree, I would prefer not to be on the sidelines when this ultimately happens," says Wyrick, whose firm specializes in advanced risk-managed investing.
Timing the market vs. time in the market
According to Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, when you start investing isn’t as important as how long you stay invested. And that’s a maxim to remember in a pandemic, too.
“The best way to build wealth is to stay invested, but I know that can be challenging,” Cheng says in an email interview.
It’s easier if you invest only for long-term goals. Don’t invest money you may need in the next five years, as it’s highly possible the stock or mutual fund you purchase will drop in value in the short term. If you need those funds for a large purchase or emergency, you may have to sell your investment before it has a chance to bounce back, resulting in a loss.
But if you’re investing for the long term, those short-term drops aren’t of much concern to you. It’s the compounding gains over time that will help you hit your retirement or long-term financial goals. (See how compounding gains work with this investment calculator.)
The water’s fine, but wade in slowly
One of the best strategies to remain calm and stay invested during periods of volatility is a technique known as dollar-cost averaging.
Through this approach, you invest a specific dollar amount at regular intervals, say once or twice a month, rather than trying to time the market. In doing so, you’re buying in at various prices that, in theory, average out over time.
Wyrick notes this is also an excellent strategy for first-time investors looking to enter the market during times of uncertainty.
“It’s very difficult to time when to get into the market, and so there’s no time like the present,” Wyrick says. “I wouldn’t go all-in at once, but I think waiting around to see what happens to the economy or what happens to the market in the next three, six or nine months in most cases ends up being a fool’s errand.”
So how, exactly, do you start dollar-cost averaging into the market? A common strategy is to pair this with stock funds, such as exchange-traded funds. ETFs bundle many different stocks together, letting you get exposure to all of them through a single investment. For example, if you were to invest in an S&P 500 ETF, you would have a stake in every company listed in the index. Rather than investing all your money in a few individual stocks, ETFs help you quickly build a well-diversified portfolio.
To dollar-cost average you could set up automatic monthly (or weekly, or biweekly) investments into an ETF through your online brokerage account or retirement account. Through this approach, you would achieve the benefits of dollar-cost averaging and diversification, all through a hands-off strategy designed for building long-term wealth.
More From NerdWallet
- How the Pros Ride Market Volatility — and Why You Shouldn’t
- If Doing Less Means Saving More, Try These 5 Money Moves
- How to Diversify Investing in Stocks, Bonds and a Bit Beyond
Chris Davis is a writer at NerdWallet. Email: firstname.lastname@example.org.
The article In a Year of Uncertainty, Should You Still Buy Stocks? originally appeared on NerdWallet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.