After a bumpy several months, the stock market took another turn for the worse recently. The S&P 500 is down 22% from its all-time high in January, and some investors worry a bear market could suggest a recession is right around the corner.
To be clear, nobody can say for certain how the market will perform in the near future. But that uncertainty can make it even more daunting to invest right now.
Is it still safe to invest when the stock market is volatile? Or should you hold off? It depends on a few factors.
When it’s smart to keep investing
In general, it’s a good idea to continue investing regardless of what the market is doing. While it may seem counterintuitive to keep throwing money into your investments when they immediately drop in value, investing during periods of volatility can actually save you money over the long term.
When the market is in a slump, stock prices are lower. This means stocks are essentially on sale, and it’s a fantastic opportunity to load up on expensive companies for a fraction of the cost.
If you only invest when the market is thriving, you’re only buying stocks at their highest prices. Over decades, that can add up considerably, and you may end up spending much more overall than if you’d also invested during downturns.
Also, keep in mind that no matter how far stock prices fall, you won’t actually lose any money as long as you hold your investments. Your portfolio may drop in value in the short term. But when the market eventually rebounds, your investments will hopefully regain their value.
When it’s better to avoid investing
Stock market downturns can be smart buying opportunities, but there are some situations where it may be best to hold off on investing.
For example, if you don’t have an emergency fund, you may want to focus on that goal before you invest your spare cash.
If you don’t have an emergency fund and you face an unexpected expense, you may have no choice but to tap your investments. However, while downturns can be a good chance to buy, they’re also one of the worst times to sell your investments. Because prices are lower, you could end up selling your stocks for a discount during a downturn, losing money in the process.
Also, it’s best to avoid investing any money you may need in the next several years. Nobody knows how long this downturn might last, and it can sometimes take months or even years for the market to fully recover from slumps.
If you’re investing money to, say, pay for the down payment on a house in a few months or a year, there’s a chance that stock prices could fall further by the time you’re ready to withdraw that money. If that happens, you may need to either sell your investments at a loss or postpone your financial goals until the market recovers.
Surviving this stock market downturn
Nobody knows for certain how long this slump will last or how far stock prices will fall before they recover. But the market should rebound eventually.
If your finances are in good shape and you have money to spare, investing when prices are lower could be a smart move. But if your savings are falling short or you expect to need your extra cash in the near future, it pays to focus on those goals first.
The right move for you will depend on your unique situation. But by understanding all of your options, it will be easier to make the most of your money — regardless of what happens with the market.
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