Key Takeaways:
According to global investment bank Goldman Sachs, investing in the stock market over the last 140 years has resulted in an average return of 9.2% each decade. From 2010 to 2020, however, the same 10-year stock market returns averaged out to 13.6%. The data doesn’t lie: The stock market goes up more often than not. As a result, all of today’s major indices are either at or near all-time highs, which has left a lot of new investors asking one simple question: Is now a good time to buy stocks? With stocks having run up so much in the last year, is now even a good time to start investing in Wall Street?
Despite gains made in the last year, investing in the stock market is more viable than ever. If for nothing else, empirical evidence suggests returns aren’t the result of timing the market, but rather time in the market. The real money is made by investors who sit patiently through short-term volatility to realize long-term compounding gains. That said, there may be no better time to start investing than today. The longer someone invests, the more likely Wall Street is to simultaneously mitigate risk and increase returns.
Is Now A Good Time To Buy Stocks?
Today may be the best time to buy stocks; not because of market fundamentals, but instead because it’s sooner than tomorrow. You see, the stock market is a compounding machine; the longer investors hold on to their shares, the more likely they are to realize attractive returns. Money placed in the market today is more likely to be worth more than money placed in the market a year from now. Consequently, now is a good time to buy stocks because it gives shareholders more time to compound their returns. If that wasn’t reason enough to start investing today, here are a few more reasons now is a good time to buy stocks:
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You Should Start Investing In Your Future
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It’s A Great Time To Buy Undervalued Stocks
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Growth Stocks Have Strong Long-Term Potential
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Tech Stocks Are On The Rise
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1. You Should Start Investing In Your Future
Those who have excess capital to invest in the stock market immediately are awarded an inherent advantage: compound growth. Few investment vehicles, for that matter, give investors a greater ability to grow their money over long-periods of time. Here, we’ll compare two of the most popular ways to compound savings: high-yield bank accounts and the stock market.
You could set aside some money each month in your bank account, but even a high-yield savings account will only result in an interest rate somewhere in the neighborhood of 2.0%. That means an initial deposit of $1,000 will earn you about $20 over the course of a year. Patient savers who keep the money in their account for another year will see their interest grow to $20.40 (because they are now making 2.0% on their initial deposit and the interest they accrued).
The trend continues to compound each year and adds up over time. The same account will be worth $2,208.04 after 40 years, more than doubling with no additional investments or work. Of course, the savings account will grow considerably more in the event you add more money each month, but this example is to show how your money can grow without doing anything. Nonetheless, a savings account is not the optimal way to save for your future.
Putting money into a savings account is a way to “save” money, but it’s not necessarily a good way to save money. If for nothing else, inflation will offset the 2.0% interest rate, or even detract from it. In the last year, in particular, a savings account would have actually lost people money. According to the U.S. Labor Department, the annual inflation rate rose 5.0% for the 12 months ending in May 2021. Consequently, the price of goods and services rose more than twice as much as the money placed in a high-yield savings account. People using a savings account to save for the future actually lost money (their money could buy less).
Instead of a savings account, the stock market is a much better way to invest in your future. By contrast, Wall Street has historically delivered a 10.0% average yearly return for patient investors. That means the stock market generates returns for investors that not only beat inflation, but also compound wealth overtime at a higher rate than savings accounts.
Let’s say, for example, you take that same $1,000 you would have put into a savings account and you put it into the stock market. Instead of a 10.0% annualized return however, let’s use a 7.0% return to account for short-term volatility. After one year, the $1,000 investment would turn into $1,070. After two years, the investment would be worth $1,144.90; that’s already $104.50 more than the previously discussed savings account after two years. However, when you take that same $1,000 and extrapolate it over the course of 40 years in the stock market (earning a 7.0% annualized return), it will turn into $14,974.46.
The power of compounding growth is magnified exponentially when you add to your investments on a regular basis. Let’s say you don’t have $1,000 to invest right away. For the sake of this example, let’s say you can only invest $100 a month. Investors who are able to invest $100 a month for 40 years (in a stock market with 7.0% annualized returns) will eventually turn $48,000 of their own money into $239,577. Therein lies the true power of compounding growth: The longer investors are able to save for their future, the more their investments will grow.
2. It’s A Great Time To Buy Undervalued Stocks
Between January and March of 2020, the S&P 500 dropped somewhere around 25.0% as the market responded to COVID-19. Fear and uncertainty all but uprooted the entire economy in a matter of weeks, and equities took the brunt of the decline.
Since that time, the market has made a remarkable comeback. As vaccines grow more readily available by the day and the light at the end of the tunnel gets brighter, the economy grows incrementally stronger. As positive news spreads, the market reacts in kind. Since bottoming out in March, the market has climbed upwards, surpassing pre-pandemic levels in as little as four months. Most recently, the S&P 500 kicked off the second half of 2021 by testing new highs.
Today’s investors have been given a unique opportunity to take advantage of a market that’s still trying to find itself. While the S&P 500 is higher than ever, many equities have been reeling in the wake of the pandemic. Many aerospace, travel, real estate, hospitality and restaurant stocks still have yet to return to pre-pandemic levels. Their descent in the last year is primarily the result of the pandemic, and not underlying business fundamentals. Still, Wall Street undervalues them because it can only look so far into the future. In reality, there are a great deal of stocks that remain undervalued and will most likely return to full strength when the economy does.
Investors who are able to find the best undervalued stocks will increase their chances of simultaneously increasing the value of their portfolio and mitigating risk.
3. Growth Stocks Have Strong Long-Term Potential
In addition to undervalued stocks, today’s market appears to have given way to a new generation of growth stocks. The advent of technology and human ingenuity have combined to usher in a new era full of long-term potential. Along with the 5G revolution, the stock market plays host to several companies that specialize in everything from autonomous driving and artificial intelligence to the cloud and gene editing. At the very least, a number of new and promising industries are considered to be in their infancy. Those who get in on the ground floor of today’s greatest growth stocks could ride decades of appreciation.
4. Tech Stocks Are On The Rise
At the beginning of the year, investment firms rotated out of the technology industry in exchange for equities which would benefit more from inflation and the reopening of the economy. In other words, big investors traded their high-growth tech stocks for safer plays that would benefit from more people going out. In removing tech from their portfolios, a number of promising tech companies took a hit to their valuation; not because of anything that has to do with the businesses themselves, but instead because of overall market sentiment.
It is worth noting, however, that the rotation out of tech seems to have come to an end. With the selloff continuing for several months, many of today’s most promising tech companies are actually trading at a discount. Prices have risen since the selloff ended, but today’s best tech companies will look to continue their upwards trajectory. Those which are truly disruptive could exercise years (if not decades) of price increases.
Tips For Buying Stocks Now
Is now a good time to buy stocks? All things considered, now is the best time to buy stocks if you can adhere to the tenets of Wall Street. Follow these tips for buying stocks now if you want to give yourself the best odds of realizing success:
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Go In With a Plan: It is never a good idea to invest without a plan. Even investors who choose the best companies to invest in can ruin their portfolio without a coherent strategy. That said, you’ll want to know what you intend to do in the stock market before you even buy your first equity. Implementing and sticking to a plan will not only help you figure out where to put your money, but it’ll tell you want to do with gains and losses, and how long your time horizon is.
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Play The Long Game: There are several different types of investment strategies, but the most tried and true of them all is the buy-and-hold technique. In buying and holding, the hardest thing an investor will have to do is literally nothing. While it may be tempting to sell at all-time highs, or even lows, true conviction in a stock can lead to even more gains. Those who are able to hold for years, even when realizing new highs, will be rewarded accordingly.
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Accept Short-Term Volatility: The stock market tends to drop faster than it rises, but it almost always rises more than it drops; that’s the key to long-term profits. Investors must accept that every stock (no matter how good it is) will have its bad days. However, those who stick through the bad days will be the most likely to realize the biggest returns.
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Build a Diversified Portfolio: Even the best investors make mistakes. To that point, every investor must at least assume they will strike out occasionally. In order to mitigate the impact of mistakes, however, investors can diversify their holdings. In building a diversified portfolio, investors are more likely to offset losses with subsequent gains.
Don’t Time The Market
Timing the market is a fool’s errand, and—despite what many may say—quite impossible. There is no universal strategy which will allow anyone to time the market perfectly, and today’s best investors don’t even bother trying to do so. Warren Buffett and Peter Lynch, two of the greatest investors of all time, are convinced that great portfolios aren’t built by timing the market, but instead by being in the market for a long time.
Lynch even goes as far as suggesting that timing the market can do more harm than good. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves,” Lynch famously said.
Instead, investors should find an entry price they are comfortable paying for and do nothing else. Gain, time in the market is better than timing the market. As discussed earlier, truly great stocks will compound over time for patient investors. Coincidently, it doesn’t matter when you start building a position in a stock, only that you buy the right stock and hold it. Attempting to time the market to save a few bucks won’t make a difference in a decade once the stock has increased significantly in value.
Summary
The stock market has had an impressive run as of late. The S&P 500 seems like it’s testing new highs everyday, which begs the question: Is now a good time to buy stocks? In a word, yes. Now is a great time to buy stocks, but not for the reason many probably assume. While market fundamentals are in line with savvy investors who know where to look for deals, the real reason now is a great time to buy stocks is because of long-term compounding potential. In other words, the sooner someone can start investing, the better. The earlier someone can build a strong, diversified portfolio, the more likely they will be to realize attractive returns and mitigate risk.
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FortuneBuilders is not registered as a securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority (“FINRA”), or any state securities regulatory authority. The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only is not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned.
