Kirk B. Reed, CFP®
Well, invest in what? The U.S. stock market? International stocks? Bonds? For the purpose of this article, let’s focus on the U.S. stock market. I think that’s what a lot of people think of when they say “the market”.
There certainly has been a lot of excitement in the stock market over the last few years. It seems there is a 1% movement either up or down almost every trading day! So I can see why someone might be hesitant to invest a big chunk of money only to see it drop a few percentage points after a few days in the market. One way to mitigate that risk is to invest portions of the overall sum over a period of time (say every 6 months). This technique is commonly referred to as “dollar cost averaging”.
Looking back even further, there have been plenty of events to cause investors to be unsure about the market: Korean War, Cuban missile crisis, Vietnam War, September 11, the housing meltdown, etc. People were concerned that they would lose large amounts of money. Even the most experienced investors lacked confidence in the future of the economy and the stock market during those times.
Still, throughout it all, investors who stayed with their plan and stayed invested through the years made money. If you want investing to really work for you, you need at least somewhere in the neighborhood of 10 years to let the market do its thing. While the market has increased in size/value over time as companies and the economy has grown, not every year has been or will be smooth. One way to help reduce the volatility in a portfolio is to have a diversified strategy of not just U.S. stocks, but international stocks and bonds as well.
While there are no guarantees in investing, the odds are more in your favor that you’ll achieve a reasonable rate of return the longer your time frame. With 10 years or more to let the market work for you, you have a pretty good chance of meeting your goals.
So while there is always the chance (read: inevitability) of short term downward volatility, the long run has historically provided the upward volatility necessary to make money. The best investing approach is to choose a diversified long term strategy and stick with it. When you employ that strategy (i.e. invest) is almost irrelevant in the long run.