Is now a good time to buy stocks?
It’s hard to know when to buy stocks
As I have detailed, I have my portfolio invested in 10 different index funds, and most of the investments that I own are stocks. As we approach ten years of consistent economic expansion, and one of the longest stock market bull runs in history, it’s only natural to wonder if this is a prudent time to continue investing in stocks.
The long term trend with stocks is quite clear from the chart above: up. But, no one wants to buy in at the top of the market. It’s a natural fear and one that I am constantly confronted with as I continue to invest money into my portfolio. I often find myself wondering if it’s a smart idea to continue putting my money into equities, and when the right time to stop might be. That’s the focus of today’s post.
When is a good time to buy stocks?
As you can see in the view below, asset class returns vary wildly over time. For US stocks, the average annual return since 2003 has been around 10%. However, those returns have varied quite a bit, with a massive drop of 37% in 2008, and a 32% gain in 2013.
One would think that the best time to invest in stocks is right after they take a massive nose dive, like in 2008. Although we can see the incredible performance of the market in 2009, with a 26% gain, the truth is that there haven’t been too many buying opportunities like this. To put it bluntly, the market doesn’t take a shit that often!
What’s more, just because bad years are good buy indicators doesn’t mean that a strong year is a sell indicator: in 2012 the market was up 16%, but the following year it was up 32%. That would’ve been a disappointing gain to miss out on.
It is nearly impossible to know how stocks are going to perform in any given year. In fact, it’s hard to know how any asset is going to perform, which is why I am highly diversified into 10 different funds ranging from hyper-safe treasuries to ultra-aggressive emerging markets funds. Invariably, something is going to be taking a hit at any given time. But there is always something that is performing well that balances out the poor performers.
For instance, you can see my portfolio performance from Personal Capital below. My bond funds have been taking an absolute shellacking this year, but I am still about even thanks to diversification and the relatively good performance of my US stock market investments. Someday, when the stock market does take a hit, my bond funds will perform amazingly and balance out the potential drop in my stock market investments.
But what if I invest at the absolute top of the market?
Even though we’ve established that it’s best to be invested in the stock market there’s always a natural fear of investing at the absolute peak of the market. Let’s take a look at what would happen in that exact situation.
Let’s say that I invested $50,000 right at the peak of the stock market in 2007, and that I continue to invest $10,000 for each year following that.
Even with the worst possible timing, it still ended up being a good investment over time. The key with timing stock market purchases isn’t necessarily timing, but commitment. My bad timing in the situation above was completely erased by my continued investments of $10k every year, and refusal to sell or bail out when the investments took a hit.
In other words, discipline is more important than timing when it comes to stock market investing. With an average return of around 10% each year, even awful, horrible, incredibly stupid timing can be easily erased.
Next steps: learn more
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