Key Points
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Establishing an investing routine is more important than avoiding falling prices.
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It’s best to invest only money you won’t need for bills, emergencies, or near-term purchases.
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Price declines mean that investors can accumulate more shares — helping them to achieve long-term success.
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The thought is inescapable: If I invest today, what if the market drops tomorrow? It’s a question that can give everyone pause. After all, no one wants to see their newly invested money lose its value.
Yet the alternative creates an even more dangerous trap: Once you start waiting, what could possibly convince you it is ever safe to buy? That’s why, when dealing with money you won’t need for many years, it’s better to build a plan based on uncertainty than to keep waiting for the perfect entry point.
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Waiting can become a bad habit
War. Economic turmoil. Apocalyptic forecasts. The reality is that these things come and go. Sometimes the market falls as a result. Sometimes it doesn’t. In reality, an informed person can always find what may seem like a reasonable excuse to postpone investing.
Worse, this anxiety often shows up no matter which way the market moves: Rising prices can feel expensive; falling prices feel like a warning sign. Nevertheless, studies have made it clear: Those who put money to work in the stock market have consistently outperformed those who have tried to time the market or remained in cash.
The same contribution can buy more shares
One way to clear the psychological hurdle of investing in a falling stock market is to recognize that lower prices can offer benefits. First, they mean you can buy more shares.
For example, imagine an investor who puts $200 to work in the stock market each month, buying an index exchange-traded fund (ETF) valued at $100 a share. That results in two shares per month. However, if the index ETF falls to $80 a share, the same $200 investment buys 2.5 shares per month.
Granted, the earlier-purchased shares have lost value, and buying more doesn’t erase that loss. However, for those buying with the intention of holding for decades, the lower price can help them accumulate many more shares.
In the long run, that will result in more assets, which will in turn generate added returns. In other words, it can help power the compounding mechanism that drives buy-and-hold investing.
This is the essence of dollar-cost averaging. By regularly setting aside money for investment, a person can remove the emotional guesswork of investing and, if the market declines, lower the average price paid.
Protect the money you’ll need sooner
Another reason some people fear investing into a downturn is that they are putting the wrong money to work in the wrong way. That is, investment money should be reserved for long-term goals that won’t be interrupted by short-term challenges. Emergencies, bills, and near-term purchases should come from a separate pool of money.
That way, investment money can fluctuate without affecting a person’s ability to make ends meet. Moreover, by having a separate cash reserve, a person won’t be tempted to sell investments during a downturn to raise cash.
Lastly, it’s important to establish the right investing routine. If $200 per month is too much, lower the amount; don’t give up on the routine. If finding the right stocks seems overwhelming, start with an index fund that tracks the S&P 500 — many are incredibly cheap, and buying shares has never been easier. Also, an S&P 500 index fund is a great way for investors to stay diversified, because the index itself spreads money across many large American stocks.
Why I’ll keep investing
Is a bear market coming? Perhaps. Does that make me nervous about investing? No. That’s not to say that a bear market drop wouldn’t hurt. It’s just that long-term investing requires the fortitude to ride out dips, corrections, and even bear markets.
The best investors are often the ones who can see downturns for what they are: opportunities for long-term investors to accumulate more shares at a lower price.
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Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
