So it’s late 2022. Like, late December 2022. You may have been thinking all year “Should I start investing now?”
“Is it too volatile right now?”
“Is the market too far down right now?”
As you may or may not have heard, the world recently got even close to recovering from a global pandemic. One that not only affected peoples’ health in incomprehensible ways but one that also destroyed the global supply chain. We still see these effects to this day: shipping delays and out-of-stock electronic components.
These supply chain failures not only affect the end consumer, but also all of the businesses in between, from raw material suppliers to the final seller. If these companies can’t ship products to their customers, they aren’t making profits.
It’s scary to invest in a company when you see that they are struggling. You may not even be certain that they are going to recover from this downturn.
This post will go over whether you should start investing in the stock market right now
Start Building Early
It is commonly known that how you build wealth on the stock market is through compound interest. Compound interest is the magic of the stock market. Allowing you to go from $0 to $100,000 by investing $100 a month.
The key and immutable requirement of compound interest is time. Even if you had $1 million, you wouldn’t be able to take advantage of compound interest any more quickly than anyone else in terms of percentage. Compound interest needs time to create small gains, that help create slightly larger gains, creating even larger gains, on and on.
To take the most advantage of compound interest, you need to start early. Assuming you have a goal of eventual retirement, the earlier you start the better. One additional year of investing can make a world of difference.
Let’s say you were fearful of investing due to the current market, so you waited one year. Well, assuming after that you invested $200 a month for 35 years, you miss out on ~$67,400 just by not investing for 36 years. This is even assuming a conservative 7% rate of return. Remember, you would only contribute $2,400 that year. The other $65,000 is just compound interest at work.
I say all of this not to scare you, but to emphasize how much of a difference a seemingly short amount of time can make. You may feel you are saving yourself from investing during an inopportune time. But in reality, you are robbing yourself of additional exposure to the market and compound interest.
Everything’s on Sale!
Stocks aren’t often thought about in the context of that heading right there. Usually, we think about stocks as something that we are excited about when they rise and scared of when they fall.
I instead find it very powerful to think of stocks in the way Dave Ahern from the Investing for Beginners Podcast does. Socks.
Yes, socks. Imagine you walk into Target one day. You see your favorite pair of socks on sale for 50% off. You have worn and loved these socks for years. The socks on sale are the exact same socks, the same quality, just at a lower price due to outside influences. You would jump on that, right? You may even buy two packs because of the sale.
Now flip around that metaphor. Swap Target to the stock market and the socks to a stock. Maybe even imagine that stock to be Target since that seems like a clever way to phrase this metaphor. Again, we are assuming that Target is of the same quality under the hood, just at a lower price due to widespread fear.
That opportunity is just as worthy of jumping on as the socks. Maybe even more since this one will build you wealth for decades to come instead of just a small amount of sweat.
It’s important to ensure that the company hasn’t changed in any detrimental ways under the hood. But assuming you have done your research regarding that, picture the stock being on sale instead of dropping.
By buying in at a lower price, you are supercharging your compound interest and wealth-building capabilities.
The Power of Dollar Cost Averaging
I have covered dollar cost averaging a bit before, but here’s a summary.
Dollar cost averaging is the investing strategy of investing on a set frequency, a set amount of money into a set stock and/or fund. The goal of this strategy is to track the market over the long term, hence the “averaging” portion of the term. The average of all of your investments will be the market itself.
The vast majority of investors aren’t able to beat the market. Even those getting paid huge amounts of money usually either meet or fall behind the market.
The most important part of dollar cost averaging is consistency. You must be consistent in your investment to succeed at dollar cost averaging. This includes investing during both downturns and market booms.
If you start investing now, dollar cost averaging will ensure that you see success regardless of the current downturn.
Dividends Take Time
Dividends are another topic I have covered before. But since you’re so nice, I’ll give a summary of that too.
Dividends are funds paid out by stocks to their shareholders in exchange for the shareholders continuing to hold onto their stock. Investing always involves some level of risk. Dividends are a reward for taking on that risk by investing in their company.
An important aspect of dividends is that they are only paid to investors who held their stock prior to their “ex-dividend” date. Only investors who held that stock prior to the ex-dividend date receives a dividend. The longer you wait to invest, the more of these ex-dividend dates are passing by and you miss dividend payouts.
An advantage to stocks that pay a dividend is that they offer an additional form of compounding. With all stocks, gains compound over time as a 10% increase means far more for a $1,000/share stock than a $100/share stock. However, dividends have a similar effect.
When you reinvest dividends, you increase your ownership in the company over time. Resulting in larger dividends, leading to greater ownership, and compounding over and over again.
The longer you let this cycle go on, the greater the effect. Starting to invest earlier rather than later allows you to collect more of these payments and increase your ownership past your own deposits.
Dividends Mean More in a Downturn
I love dividends no matter how the market is behaving. However, they are especially powerful during downturns.
See, dividends are paid out in certain amounts, not percentages. This means that as a stock price decreases, the dollar amount of the dividend of a good company stays the same or even increases. More importantly, the percentage yield of the dividend is actually increasing.
A $4 dividend on a $100/share company goes from a 4% yield to 8% when the stock falls to $50/share. Thus, when the market is in a downturn, dividends are offered higher than normal returns.
Combine these returns with averaging down your costs by buying stocks when they are cheap and you have magic. Add these higher dividend returns with massive returns when the market recovers and you have a financial opportunity you don’t want to miss.
Ride the Recovery
The past is never a guarantee of the future. However, with over 100 years of stock market history to look back on, we can be very confident that past events will repeat themselves.
Historically, the market has always recovered. Even when the market has fallen by 89% in 1929 or 22.6% in 1987, the market eventually recovered. The downturn we are seeing now due to COVID is nowhere near the most severe downturn the market has survived. I myself am certainly betting on the recovery of the market.
If/when this recovery occurs, it is extremely advantageous to be invested for it.
When the market is behaving normally – slight increases and decreases – you can expect the standard 7-10% returns. However, when you average your cost down during downturns, you can generate a return close to the recovery. For example, if you average your cost down significantly during a 25% downturn, close to what we are seeing now, you could absolutely generate a 10% return. This isn’t even factoring in any gains once the recovery is complete. Add this to normal activity post-recovery and you are looking at a possible 20% return.
The fact is that we don’t know when this recovery is going to occur. Not even analysts have a clue. It could even get worse before it gets better. But the key piece that most investors miss and fail because of is investing and holding regardless. If you try to be slick and time the market, you are likely going to fail and fall behind with everyone else.
Instead, I would get started investing now, regardless of the downturn. Setting up automatic deposits and investments to start dollar cost averaging into this lower price. This would set me up for massive potential gains.
Volatility Affects Large Accounts More
In addition to being in a downturn right now, the market is also extremely volatile. In the stock market, volatility means that the market swings up and down significantly in a short period of time. Historically, the market may move by .5-1% in a day. Recently, the market has been moving as much as 3% consistently on a daily basis.
It’s scary to see this volatility. It’s scary to imagine investing on a wrong day and seeing your investment immediately tank.
However, remember a few things. First, the market moves in percentage changes, not amounts. This is important because if you just started investing and have $1,000 in your account, your account will move far less in terms of actual funds than someone with a $100,000 retirement account.
Second, as a new account, you will have more time to recover from this downturn. The earlier you start, the more time you give yourself to make up for any short-term losses. A person expecting to retire off of their account would be far more affected by a 5% short-term loss than someone retiring in 10 years.
Third, with a smaller account, dollar cost averaging will have a greater effect on you. Dollar cost averaging $100/month will do more to swing a $1,000 account than a $100,000 account. This is because the monthly deposit makes up a greater percentage of the smaller account, giving it more power to swing its average cost.
Diversity to Protect from Volatility
If volatility is still a fear of yours, you can do your best to protect yourself from it through diversification.
Diversification involves spreading out your investments between different sectors and companies so that when one company or sector tanks, it is only a portion of your portfolio.
A very simple way to diversify is to invest in funds that track the stock market like VOO. This invests you in portions of the top 500 companies on the stock market, giving you huge diversification. Of course, if the market drops by 3%, you will still drop by 3%. Plus, the top 500 companies tend to be more heavily weighted to tech stocks. This exposes you more to the ups and downs of the tech world than any other sector.
Another, more complicated method to diversify, is to invest in many individual stocks in different sectors. This method requires far more research and time to pick out stocks. The important part here is to spread out your investments into 12-20 individual stocks, more or less equally weighted in different sectors. With this method, you may not get the same 3% gains in a day, but you also likely won’t get the same 3% losses in a day.
For more info on stock picking, check out my post on buying and selling stocks.
Now is Always the Right Time
Most of the reasons above to start investing involve the current stock market downturn. This is very powerful as we have a unique opportunity right now to take advantage of this downturn. We all want to find a way to make more money, right?
However, you may be reading this in 2023, 2024, or maybe even 2025. In that case, regardless of what has happened, it is still the right time.
The important thing about the market is time. Time to build compounding in growth and/or dividends. Time to invest more portions of your paychecks into the market so that a given percentage swing makes a bigger difference. All of those are far more important than timing the market perfectly with a downturn.
If you decide you want to get started investing right now, check out my post on the top 5 online brokers.
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