Whenever the economy experiences volatility there are always a few common questions that we receive. What is going on with the market? What should I be invested in? Should I pull my money out of the market? However, for those who have the means, the question tends to be, “is now the right time to invest more?” The tendency of financial advisors is to answer with the infamous words, “well that depends”. And it certainly does! The decision to invest more of your hard-earned dollars in your investment account depends entirely on your own personal financial situation. So, before you decide to invest more in your account, you should ask yourself a few questions. Namely, consider these two factors: time horizon and opportunity cost.
Any decision to invest in the market should be weighed against your need for cash in the future. Specifically, if and when you will need cold hard cash. Do you have any short-term needs like buying a new car or having a baby? Or are your primary concerns around retirement or saving for your child’s education? Determining the length of time until you will need cash on hand is what we refer to as your time horizon. Determining your investment time horizon is the first step in making the decision to invest in the market. If you only have $10,000 in cash but know that you need to buy a car in the next year then you probably shouldn’t invest more in your account. Alternatively, if you have no such immediate needs and are more concerned with saving for retirement, then investing further could be a perfectly logical decision.
Another factor that plays a role in determining your time horizon is your emergency savings fund. Conventional wisdom would tell us that an individual should have enough in cash reserves to pay 3-6 months in necessary expenses. It is important to take this into consideration when you are determining your short-term needs. If 3 months of expenses is $9,000 and you have $20,000 in cash, don’t invest the whole amount and drain your emergency fund!
When most people ask whether or not to invest in the market, they aren’t thinking about their financial plan or time horizon. They are thinking about conditions in the markets and the opportunity to make a lot of money. This is certainly an understandable sentiment and worth considering but only after a plan has been established and a time horizon determined. Ok, now that I have gotten that out of the way let’s talk about the elephant in the room: the market is WAY down this year. Should you take advantage of the drop or wait and see if it drops further after the midterms? Let me answer that question with another question. Which scenario is going to cause you greater unhappiness?
1) You buy in the market now when the S&P 500 is down about -14% and it drops to -20% by the end of the year.
2) You wait to buy until the end of the year and the market rises to positive single digits
Of the two scenarios, I am of the opinion that the latter would be far more disappointing that the former. Right now, investors are buying into the market at a discount of 14% or more. If the market drops another few percentage points by year end, are you really going to be all that disappointed that you missed out on a slightly better discount? Or are you going to be more disappointed if you hold out and miss the discount entirely? This is a classic example of what we call opportunity cost. By investing now, you may miss out on the opportunity to buy lower. By waiting, you may miss the opportunity to buy at any discount at all. The choice is yours but generally speaking I would rather get it while the getting is good.
Lastly, I think that it also very important to consider the value of time in the market versus trying to time the perfect time to jump into the market. Below is a graph showing the This is the total return of the S&P 500 Index going back to the year 1990.
See that dip on the end of the graph? That’s where we are at right now. The index has steadily chugged along these last 30 years with some notable exceptions like the crash in 08’-09’, the pandemic in 2020, and inflation now in 2022. But when you consider that most people invest for around 30 years before they retire, do short term drops like this really matter? I don’t want to be dismissive of anyone’s legitimate concerns (particularly those approaching retirement). However, if you are investing for the long-term then the current conditions of the market should not be a big concern for you.
It is also worth noting that, regardless of even the steepest drops, the index has averaged around 10.43% in annual returns over the last 30 years. The average for the first 20 years of that period was about 8.77% (1990-2010). Safe to say that the 2010s provided us with some pretty incredible investment gains! I guess what I am trying to say is that it is important to remember that time in the market beats timing the market every time! And you can’t ride the waves like we saw in the 2010s if you aren’t already invested! In short, “when in doubt, zoom out!”
Thanks for reading this week’s blog post and if didn’t already know, “A Wing and a Plan” is now also a podcast! You can find us on Spotify, Google Podcasts, Amazon Music, and iHeartRadio. Finally, your song of the week is a new one from my favorite band. Enjoy!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss.