As of May 20, the S&P Index of 500 of America’s biggest companies was down a sizable 18% year to date. The Nasdaq stock market was down much more — 27%. Big drops understandably get many investors rattled, sending them heading for the doors. Indeed, lots of investors selling is what sends the overall stock market south in the first place.
With all that panic and all that selling going on, what should you do? Well, there’s a good case to be made that you should buck the crowds and buy stocks. Here’s a look at whether you should do so.
Image source: Getty Images.
To be fair, plenty of people should not be investing in stocks right now:
Don’t buy stocks now if you’re carrying much high-interest-rate debt; pay that off first. You might hope to earn 10% or 12% or more, on average, annually in stocks, but that’s not guaranteed — and if you’re paying 16% or 20% or 25% in interest on your debt, you’ll lose ground.
Don’t buy stocks now if you don’t have an adequate emergency fund ready. You should aim to have at least three months’ worth of all living expenses available in case you lose your job or have a costly health setback or even just need a new transmission. To be more conservative, have more than three months’ worth available.
Don’t buy stocks now if you can’t handle risk. The stock market will always be volatile, to some degree. There are stock market crashes or corrections (drops of more than 20% or between 10% and 20%, respectively) every other year or so on average. But the market has always recovered after a drop, and there are few better ways to build wealth over many years than in stocks, so consider reading up on stocks and investing, to get more comfortable with the idea. For example, you need to know not to put any money in stocks that you’ll need within the next five or so years — because you don’t want an unexpected market downturn just before you need to sell.
If you’re free of high-interest-rate debt and you have an emergency fund ready and you know what to expect from the stock market, this is a terrific time to invest in it, as so many stock prices are depressed. It can be very easy to do, as well, if you just stick with low-fee, broad-market index funds, such as ones that track the S&P 500. Here’s an S&P 500 index fund and two other solid index funds to consider:
Vanguard S&P 500 ETF (NYSEMKT: VOO)
Vanguard Total Stock Market ETF (NYSEMKT: VTI)
Vanguard Total World Stock ETF (NYSEMKT: VT)
Respectively, they’ll quickly have you invested in about 80% of the U.S. stock market, the entire U.S. stock market, or just about all of the world’s stock market. (There are plenty of other good, low-fee index funds, some of which target bonds and other segments of the market.)
A great way to build wealth over time is just to keep adding money to one or more index funds.
If you want to grow your wealth even faster, you might add some growth stocks to your mix. Growth stocks are tied to companies growing at a faster-than-average clip. They can deliver amazing returns, but they can also be more volatile and risky and often trade at rather lofty levels. With the market down so much lately, though, most of them are trading much lower, which is great!
Here are just a few solid companies you may have long wished to have in your portfolio. If so, you’re in luck, because they’re on sale:
Stock
Change from 52-Week High
Airbnb
(47%)
Amazon.com
(43%)
Apple
(25%)
Home Depot
(32%)
Meta Platforms
(50%)
Microsoft
(28%)
Nike
(40%)
Nvidia
(52%)
PayPal
(74%)
Starbucks
(42%)
Walt Disney
(45%)
Data source: Yahoo! Finance. Calculations by author.
Many smaller popular companies have seen their stocks fall much further — some 80% or more. Some of these can be great to buy and hold, too — but do remember that just because a stock is down sharply doesn’t mean it’s a bargain. Some stocks fall for good reasons. For the sake of diversification, consider following our Motley Fool investing philosophy, buying 25 or more stocks and aiming to hold them for at least five years. Keep up with them, though, in case any lose their promise. Don’t buy and hold blindly.
So should you buy stocks now? The answer for many of us is yes.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Selena Maranjian has positions in Amazon, Apple, Meta Platforms, Inc., Microsoft, PayPal Holdings, Starbucks, and Walt Disney. The Motley Fool has positions in and recommends Airbnb, Inc., Amazon, Apple, Home Depot, Meta Platforms, Inc., Microsoft, Nike, Nvidia, PayPal Holdings, Starbucks, Vanguard S&P 500 ETF, Vanguard Total Stock Market ETF, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, short July 2022 $85 calls on Starbucks, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
