Is Now the Time to Start Investing?
The first quarter of 2020 saw worse than expected volatility in the stock market due to the coronavirus pandemic. At the end of Q1, the S&P 500 closed down 12.51 percent over the month of March, its worst month since October 2008. This rapid decline has caused some investors to take their money out of the stock market; but some are wondering if now, when things are priced low, is it the right time to buy in? However, before jumping into the stock market, there are a few important factors you should consider.
Review Your Finances First
Before opening up an investment account, it’s important to make sure you have an adequate emergency savings fund. That way, if hard times come, you can use your emergency savings fund instead of dipping into your retirement account. An ideal goal for your savings fund is to have 3-6 months of living expenses set aside to ensure you’re better prepared for an emergency. This means you have enough to cover your essentials, including your bills, groceries, gas, insurance payments, medications and other living expenses. It may seem daunting but it helps if you take it one month at a time.
It’s also important to look at any debt you may have. If you have credit card debt or student loans, it may be smart to prioritize debt reduction with any extra income. However, that doesn’t always mean that you should rule out all investment options while paying down debt but it depends on several factors. A financial advisor can help you determine a debt reduction strategy that best fits your long-term goals.
Timing the Market
Once you’ve paid down your debt and have sufficient money in your savings, you may be wondering when exactly you should open an investment account. Should you wait until things drop even further or wait until the market is starting to recover? Long story short, it’s impossible to time the market and trying to do so is not a sound investment strategy. Even day-traders who work on Wall Street can’t predict what will happen. Not only do you need to be right when you sell but also when you buy back in.
By trying to time the market you may also miss out on some of the market’s best days. According to J.P. Morgan Asset Management’s 2019 Retirement Guide, looking back over the 20-year period from Jan. 1, 1999 to Dec. 31, 2018, if you missed the top 10 best days in the market, your overall return was cut in half.
We’ve seen that time IN the market is more important than TIMING the market, which is why having a long-term investment strategy and financial plan based on your goals is generally the wisest.
Develop a Long-Term Financial Plan
Before opening an investment account, it’s helpful to develop a holistic financial plan with the help of a financial advisor. Investments can be a great financial product but depending on your personal financial situation, it may not be the best time for you to invest. A financial plan will help you understand how much you should have in savings, how you should best pay down your debt, how much you should be investing and more based on your long-term goals. An advisor can also help you understand the risks and rewards of investing, as well as the advantages of the various types of investment accounts.
It helps to think of your finances like a complex set of interlocking gears. By turning one gear (by saving or spending more), you impact another gear. Having a financial plan helps you see how it all works together and prioritize what’s most important to you.
You Don’t Need to Be Wealthy to Start Investing
One of the most common misconceptions about investing is that you need a lot of money to get started. However, some investment accounts can get you started with as little as $50 a month. To some this may not seem like a lot but when you look at the benefits of compounding interest over time, it adds up. A financial advisor can also take a look at your finances to help you determine how much you should contribute to an investment account on a monthly basis.
Maintaining a Long-Term Perspective
During times with high market volatility, it’s best to maintain a long-term perspective. The markets have shown volatility throughout history, and this too shall pass. At times like these, it’s best to keep your financial plan in mind and try not to time the market.
If you’re ready to get started, connect with a financial advisor today. They’ll help you get on the path to help meet your financial goals.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.