You want to start investing. You hear index funds/ETFs are the proper way to do it. Yet after reading the news you learn that stock valuations are high, the bubble will burst, the economy is decelerating and a recession is coming. You feel like you don’t want to invest at a peak and then immediately see prices fall. Anxiety starts creeping in and you wonder if I invest now will I surely loose money? Is this a good time to invest?
The best time to invest was yesterday. The second best time to invest is today and to do it again tomorrow. The earlier you start investing, the earlier you can expose your savings to the power of compounding – gains on top of gains that allow you to exponentially grow your savings.
Nobody knows when a recession is going to happen. It is impossible to consistently and precisely predict it! A recession may happen tomorrow, in a month, in 2 years… While you indefinitely wait for a recession to come and the “right time” to invest you are limiting your ability to compound your returns and grow your savings.
People have been saying a market decline is imminent for years and what we got was the biggest boom period ever. In late 2018 we saw a momentary market decline that seemed to be the start of a recession yet, stock prices went back to increasing as if nothing had happened. The stock market keeps surprising us everyday. News about the impending economic doom have little use to a sound investment strategy. These news are often wrong and don’t provide details about the time, magnitude or length of such events.
Actually, even if you had perfect information about market declines (you don’t!), investing only at the bottom of the market typically underperforms investing every month. Heck, even if you only bought at the market peaks, you would still do fine provided you didn’t “panic sell” at the bottom.
Recessions happen all the time. There is no “recession clock” that tells how frequently they happen though. We had 11 major market declines since 1945. The stock market can take years to recover due to a recession. Stocks are risky, that is why they have higher returns! Recessions are part of that risk. Your investment strategy should not rest on the assumption that a recession will never occur. Your investment strategy should work despite recessions occurring. Being in the market for decades means you will experience a couple of recessions. Market prices fluctuate all the time and now isn’t any different. The purpose of adding fixed income/bonds to your portfolio is to reduce this risk. Your stocks may be worth half their peak value for years and you need to plan accordingly.
Buying more shares for your portfolio frequently allows you to mitigate the impact of price fluctuations. If you buy shares once a month/quarter you are going to buy shares at different price points. Sometimes you will pay more, sometimes you will pay less. If there is a recession a similar process will happen.
If you are young and have decades of investing years in front of you, a recession is actually good for you. The earlier it happens the better. A recession will allow you to buy many shares at substantially low prices.
The ups and downs of the market are outside your control. A sound investment strategy requires focusing on the things you can control. You control how much you allocate to equity and fixed income. You control how much you invest and how frequently. You control how much you spend in fees. You control in which funds you invest. You control your ability to stay the course. The things you control will have the biggest impact on your financial returns.