With the stock market approaching new highs – is now a good time to invest? Read further to find out the answer.
On several occasions recently, I have been asked the question— “is now a good time to invest?”
- Over the last 5 years, the S&P 500 Index has advanced more than 130%.
- Small company stocks as measured by the Russell 2000 Index have appreciated by 177%.
- Many stock indexes are currently within 1% of their all-time high.
So the nature of the question posed by clients is understandable. It is human nature to want to invest “at the bottom” and receive instant gratification for successfully timing the market.
Doing so, gives us all a little bit of confidence and validation for “stepping out on a limb” and choosing to accept investment risk.
Unfortunately, the fact of the matter is that being a successful investor, requires having the ability to stay focused on your long term financial goals and accept the reality that at some point, markets will decline. Likewise, your investment portfolio is also going to decline in value at some point.
In fact, since 1926 stocks have experienced declines in:
- 26% of rolling 12 month periods
- 13% of rolling 5 year periods
- 6% of rolling 10 year periods
In addition, on average, stocks have experienced a 10% decline about once per year, a 15% decline every other year and a 20% decline about once every 3 1/2 years. Fortunately, most investors have diversified portfolios comprised of not just stocks, but a diversified mix of stocks and bonds. Doing so, reduces the impact of these occasional market dips on portfolio values.
Regardless, do not let your fear of a possible market decline or correction impede your financial progress!
Instead, focus your efforts on those elements of your financial plan that you can control. Focus on your spending and savings rates, the asset allocation of your portfolio (the stock/bond mix), minimizing your tax burden, fully funding your emergency fund, reducing your debt load, etc. Those are the items that help you make consistent and incremental progress that over time will produce remarkable results.