Seemingly, every January, I receive a surge of people asking if they should buy more stocks in the new year. I often get questions like, “With stocks at highs never seen before, should I sell everything and go to cash?” At the very least, you could be wondering what the answer is to investing questions like “When is the best time to buy stocks?” Or “Is now a good time to buy stocks?” The answer will likely depend on when you will need the money and how you plan to use the money in the future. Some of the answers to these questions might depend on your tax bracket.
I will also give my fiduciary financial planner thoughts on the opposite questions. “Is now the time to be selling stocks?” Simply put, the answer is a big fat NO. “Will the markets drop this day/week/month/year?” Perhaps. “Will we see stock market volatility this year?” It is highly likely in any year, let alone an election year.
Will Stocks Help You Build Wealth?
If you are someone looking to build wealth over time, historically, there has not been a better place for the average person to invest than in stocks. The more time you have invested in the stock market, the better your chances of reaching financial freedom. If you saved money every month and invested those funds into a diversified portfolio over your career, you would have had a tough time not benefiting from stellar returns on your investments in the stock markets during the last 10, 20, 30, 40 and 50 years. The longer your time frame, the less you need to save out of pocket to build life-changing wealth.
The Easiest Way To Start Investing Now
Perhaps start by contributing to your workplace 401(k) for those just beginning to invest. Set up an automatic contribution into a diversified portfolio and forget about it. Your 401(k) contribution can be taken from your paycheck.
I said forget about your 401(k) in the paragraph above, but don’t forget about it. Try to increase your 401(k) contributions over time. You will get a tax break on your contributions and may even receive free money through an employer match or profit-sharing contribution.
Some people are afraid to buy stocks when they are going down, like in a bear market. Other people are scared to invest when the stock market is at record highs, in a bull market like today. Some people want to stash their cash under a mattress, no matter what. All of these types of people will have trouble building wealth over time.
How To Weather Stock Market Volatility
While the stock market has been performing well over the past year, I must emphasize that investors often make most of their money by investing during a bear market. While the last financial crisis may seem like a lifetime ago, remember, we got through it and experienced one of the longest bull markets in history. Stock market volatility is part of investing.
Even though the stock market is up year to date, we have seen more day-to-day volatility. In the grand scheme of things, what the stock market does daily doesn’t matter much regarding your chances of reaching financial freedom over the long term. That assumes the stock markets resume their upward marches as they have after every bit of bad news we have faced.
A major fund company once studied its investors with the best long-term returns. What it found may shock you. Investors with the best returns were either dead or had forgotten about their accounts. What investing wisdom can you derive from this information? The investing lesson here is that setting up your accounts well and letting them do their things is likely the best way for most people to get the best investment returns. The more you mess with your investments, the more likely you will make an emotional investing mistake, especially when markets get choppy.
With Interest Rates Up, Should I Move My Money To Cash?
Now that you can earn a reasonable amount of interest on your money, you may be tempted to move some or all of your money to cash. Research has shown that losing is more painful than winning. Vanguard gave some great examples of what happens when investors either stick with their financial plans or bail out of their balanced investment portfolios. It shared three examples of investors and their actions during one of the worst bear markets in history, the 2008-2009 financial crisis.
All three investors had $1 million in their accounts as of October 2007.
Investor 1– Let’s call her Betty. She worked with a fabulous financial planner and stuck with her financial plan. She made back all of her money by mid-2010.
According to that example, Betty ended 2017 with around $1.9 million, using a 50% stock and 50% bond portfolio. Betty nearly doubled her money by simply staying the course and riding the financial crisis.
Investor 2– We will call him Johnny. He couldn’t stand to see his accounts fluctuate in value every day. He found the down days to be especially painful. Eventually, he sold all his stocks and moved to what he saw had done better during the crisis. He ended up with a 100% bond portfolio. The supposed safety from bonds came with a hefty cost. His account took around eight years to get back to even.
According to the example from Vanguard, Johnny ended up even, at $1 million, by the end of 2017.
Investor 3– Don. He wanted to make the wisest financial choice, so he pulled everything out of his investments. He took the so-called safe route and stored all his money at the bank. With interest rates at all-time lows for most of the time since the financial crisis, Don never made back the money he lost. He essentially locked in the losses he suffered during the financial crisis. To throw a little more salt in his wound, the interest he earned at the bank did not keep up with inflation, and his purchasing power continued to erode over time.
Don fared the worst of the three investors. According to the Vanguard study, after selling in a down market and going to cash, he had just $729,214 at the end of 2017. He ended up with only 38% of the account value as investor one, Betty, who stuck with her 50/50 portfolio.
There is a risk in using so-called “safer” investments. You may decrease your chances of fully funding a secure retirement. Most people, in all-cash, will see their chances of running out of money increase. It is nearly impossible to save enough money and generate enough income to fund a comfortable retirement using just Social Security and bank accounts.
If you feel uncomfortable handling your investments when times are good or bad, consider hiring a fee-only fiduciary financial planner to do the worrying for you. They can help you stay on track for your financial goals. More importantly, they can be your accountability partner to ensure you avoid investing mistakes that keep you from reaching financial freedom.
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