Zubair Khan, CFA®, CFP®
Many investors share a common worry: figuring out the best time to get started. Their concern often comes from negative news about the markets. But if you waited until the news about markets was all good, you might never take the plunge. Pundits usually seem fixated on telling us either how bad the market is or when an up market might be ready for a correction.
Fear of a correction exists because corrections truly are always just around the corner. Markets never move in a straight upward slope. Stock charts look like an outline of a mountainous horizon off in the distance, peaks followed by troughs running into more peaks. Fortunately, for most investors, despite the ups and downs, market prices rise over longer periods of time – just not as smoothly as we would all hope.
So, how should investors time their entry into the market?
First, consider your goals for the savings you are considering investing. Most investors have long-term goals like saving for college and retirement. If that’s the case, then timing the market has very little effect over what could be potentially a few decades of savings and market cycles. Most experienced advisors will tell you that markets tend to expand and contract in short bursts. The best days in the market follow right after some of the worst days. If you miss out on those days, you could potentially miss out on a large share of the year’s returns. It’s better to ride out the tough days if you have a long-term goal.
Second, consider your level of risk. Often, how you are invested matters more than when you start investing. Research shows that the asset classes you invest in (stocks versus fixed income, for example) determine your long-term growth more than the stocks you chose or when you invested. You have to determine what level of risk you are comfortable with and whether it will help you meet your long-term goals. Remember, when you and your advisor choose an asset allocation, this should be one you are comfortable sticking with whether the market is experiencing highs or lows.
Third, know that most market corrections are already accounted for in your plan, assuming you have one. When you and your advisor sit down to pick an asset allocation, they can often determine 95% of your portfolio’s expected behavior. Other than highly improbable events, they can and do predict normal market corrections using sophisticated software and probability analysis. The lesson here is that even if you are in the midst of a downward cycle, this is most likely something that your plan has already accounted for. It’s part of the normal investment process.
Fourth, worry more about the risk in your portfolio than a potential decline in the value of your portfolio. Remember that how you invest affects your long-term savings than any other single factor. This can be hard to do when your investment account has dropped below what you originally invested, but that is when you need to remember this advice the most. Sadly, when investors see the value of their portfolios go down, some start looking for risky ways to get it back quickly to where it was before. Others leave the market altogether and/or invest in asset classes like cash, gold, or real estate. Both are wrong and can have a long-term negative impact on retirement savings.
Fifth, consider the effects of compounding. Income or gains you make this year will work for you, earning more in the year to come. There is a snowballing effect to investing that comes along with compounding. The later you start, the harder it will be for you to make up that ground. Starting now is almost always better than starting later.
Bonus tip: If you have read this entire article and you understand rationally why there is no time like the present to make your move, but you still are not ready emotionally, consider dollar cost averaging. Most investors already dollar cost average into their retirement accounts when they put their money into the market each paycheck. When the market is low, they get to buy more securities and when the market is high, they buy less. They have ultimately taken the worry that comes with market timing off the table. Even if you are someone who has a large sum of cash you have been waiting to invest, you can break up your funds into chunks and invest over time.
An Azzad financial advisor can help you with these decisions and more. Give us a call at 888.86.AZZAD or email email@example.com.