This has been a very popular topic of discussion over the last two years. Everyone of us remembers 1st Quarter 2020 when Covid-19 emerged and devastated the world. The S&P 500 plunged to a pandemic low of 2,237 on March 23, 2020. Since then, we’ve seen the S&P 500 climb to nearly 4,800 on January 3, 2022 and fall back to approximately 3,700 as of September 23, 2022. While up 65% from the pandemic low, the S&P 500 is down -22.5% year to date.
When you take a step back and digest these numbers it can be extremely intimidating and scary. This can be true whether you are a brand-new investor looking to make your first contribution or are experienced and looking to add to your portfolio. Market volatility poses the key question…when is it a good time to invest? The simple answer might be to wait until the market reaches the bottom and invest at that time; however, we all know this isn’t reality. It’s nearly impossible to predict the market bottom. If you can with proven success, please send us your resume, we would love for you to join our firm! All kidding aside, if we agree that picking a market bottom is just not realistic then we need another strategy. The truth is the strategy may be different for each individual due to factors such as time horizon, budget, and risk tolerance.
A common investment strategy is dollar cost averaging. With dollar cost averaging you are essentially breaking up your contributions into smaller segments and investing those segments over time. This is common with larger, one-time contributions. With dollar cost averaging, you don’t have to try to time the perfect entry point into the market. The converse to this strategy is to get your dollars into the market as soon as possible and let them start working for you. I tend to agree, especially if you are with a tactical investment firm. Let the professionals use their discretion to enter the market. Tactical portfolio managers put countless hours of research in, so they tend to have better market insight than the average person. They know when a stock is undervalued or overvalued. They know what projected earnings are over the coming quarters. They know where interest rates and inflation data are estimated to be heading. These along with other factors help tactical portfolio managers make very deliberate buy/sell decisions.
Dividends are something to consider as well. Many stocks, ETFs, and mutual funds pay a dividend, and these dividends are paid no matter what the market is doing. The market can be on a decline like we are seeing this year, yet the companies still pay the dividends. Dividends can often be much greater than the yield offered by bank products. So, an argument can be made to invest in dividend paying stocks sooner than later to start collecting those dividends! Reinvesting dividends allows you to buy additional shares with the goal that share prices will rise over time. A longer-term perspective is important, even if you are in the retirement phase. Chances are you have a longer period to let your money grow than you may realize.
Market declines may be a scary time to invest; however, they may also be some of the best times to invest. Think of it this way. Let’s say you go to your favorite department store, and everything is 20% off. There may be a line out the door with people looking to buy and take advantage of the sale, but there’s no way of knowing if they are getting the best deal or not. Maybe if those customers wait until next month the sale might be 30% off or there might not be a sale at all. The markets can be looked at in a similar fashion. Today the markets are giving us a 20% discount from where the overall prices were at the beginning of the year. This may be a great opportunity to take advantage of lower stock prices. Corporate earnings estimates are strong, and analysts are estimating record earnings this year for the S&P 500 and even better next year. If we continue to see strong earnings, and if inflation comes down, this might be a great recipe for a market turn around.
When you think about it, you can look back at nearly any given year in history and come up with a reason not to invest. The best approach to investing is planning, budgeting, working with professionals, and keeping a long-term perspective. We all want our money working for us; we can’t let inflation erode our savings. We need that long term growth to take care of our financial needs, and we need to accomplish this as efficiently as possible. Taking advantage of market corrections and pull backs help us accomplish these goals.
Brian Stone
Director
Disclosures:
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their wealth advisor prior to making any investment decision.
