Recent studies indicate 2022 has been the worst year for stock markets in more than 50 years. With this in mind, many investors are understandably shy to invest but historical data suggests the recent drop in prices might be an opportunity to buy discounted shares in some of the biggest names on the market. But should you actually invest in stocks at this uncertain time?
It depends on your investment strategy or goals and whether or not you might need this money in the short-medium term. In other words, if you plan to invest for more than five or ten years, right now could be a great time to invest.
In the last five year, record job numbers, low interest rates and record high salaries brought the global economy to where we are today. Inflation and the war in Ukraine exacerbated these problems and resulted in a very high cost of living. The Federal Reserve, tasked with keeping inflation under control, continues to increase interest rates to help reduce consumer demand and slow down inflation but it’s a rather slow process because they know if these rates go up too quickly, it can lead to an even bigger recession than expected.
With this in mind, the outlook for stocks has been very bleak over the past year and big tech stocks were the latest to feel the brunt of this pessimism. While some investors think the worst is yet to come, others believe the end of this downturn is in sight and these conflicting opinions is largely why many investors are asking “Is now a good time to invest in stock markets?”.
In order to decide whether or not you might want to invest, it’s important to know why the most successful investors see such volatility as opportunity…
What’s happening in the stock market is more a reflection of what might happen in the future as opposed to what is happening at this moment. This is because people feel more comfortable with investing their capital when the future looks bright and they are more likely to sell stocks when they think the opposite. It’s a rather simple and yet reasonably accurate explanation as to why stocks have been going down in value so much over the past year.
In case you might be asking yourself, ”retail investors” refers to individuals buy buy and sell shares, while ”institutional investors” refers to any companies, funds and banks. The main differences between these two is that most retail investors don’t have anywhere near the same experience, knowledge or finances available to them as the big institutional players. The latter take full-advantage of this gap and one way they do this is by selling stocks when the market seems overheated and they buying when there is a significant drop in value. Hence the saying “buy-low, sell-high” and the reason why Warren Buffet suggests people to invest “when there’s blood in the streets”.
If you can make ensue of the above concepts, you will understand why times of uncertainty are often the best times to invest. While stocks can continue going down after you buy, these are historically the best times to buy for long term investors that can afford to wait for stock markets to come back up again.
This brings us to the first piece of advice for investing in volatile times because many expert investors recommend a dollar-cost-average approach to strategy.
Dollar-cost averaging is a system in which investors contribute a specified amount on a regular basis over a set period of time. For instance, you might set up an automatic transaction in which $100 per month is invested every week or month regardless of what is happening to the price of stocks. This strategy does not try to “catch the bottom” and it is designed to minimize risk by achieving a lower average price than if you were to go all-in at once.
Speculation is rife in stock markets and there is much volatility during uncertain times which can be the cause of great stress. Making decisions under stress is never a good idea and often leads to either panic buying or selling at the worst time possible. For this reason, you need to be aware that volatility is inevitable and a cool head and patience will help you protect your investment over time.
There is no one investment strategy or style and this is something which you will need to decide upon for yourself. That is to say, it’s often wise to emulate the strategies of other successful investors but only you can know your risk tolerance and what amount of money or what type of stocks with which you feel comfortable. This requires that you do your own research and do not simply hope for the best. For instance, you absolutely must take time to consider if you actually believe that a certain company or stock will be successful in the long run and this requires you to learn everything possible about the stock.
Some stocks perform better than others depending on what’s going on around the world and diversification is a way to reduce risk in this respect. When it comes to stocks, diversification is all about investing in different types of assets which might include anything from airlines and tech stocks to banks, retail and entertainment. Some of these stocks will come with more risk than others and the idea is to avoid over-exposure to any one stock/industry etc.
If everyone knew the best time to invest, then everyone would be rich and this should tell you that even institutional investors cannot predict the future. At the same time, studies show that investors typically create more wealth through a long term portfolio than they do with short-term investments. This essentially means that you should never try to time the bottom of a market and instead focus on staying in the market over time. Simply put, you are not trying to predict stock movements on a daily basis and instead aim to outperform the average stock performance.
You should also know that time in the market does not necessarily mean that you buy a certain stock and hold indefinitely. There are times when every stock portfolio will need to be adjusted and depending on news or other factors, you may need to sell stocks from this portfolio and perhaps replace it with others.
Investing in stocks always comes with a degree of risk but long term investments in financially strong companies is historically a good idea. When it comes to volatility, these uncertain times can provide opportunity but it’s important to use a strategy that can help reduce risk and yet still ensure your portfolio has some exposure for when the stock markets return to the upside. Finally, you should never invest more than you can afford to lose and there’s never a guaranteed return but after enduring the worst year for stock markets in more than 50 years, it’s only a matter of time until things turn around again.
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