After plunging into a bear market earlier in the year in early August, the Dow, Nasdaqand S&P500 regained some of the value they previously lost. In fact, some investors are hoping that the current bear market rally will continue, allowing their portfolios to recover from the hit they suffered earlier in the year.
Unfortunately, it’s too early to tell if our bear market is really over. And stock market values could very well decline in the coming weeks.
But whether it’s an extended rally or another decline, if you’re wondering if it’s profitable to keep investing, the answer is the same – absolutely.
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Why it pays to invest in good times and bad
It’s easy to argue to stop investing when the markets go up and when they go down. In the first situation, you might delay the investment because you want to buy at a low price. And in the latter scenario, you might be hesitant to invest when market conditions are volatile and you fear further losses.
But in reality, it’s a good idea to commit to a consistent investment schedule and stick to it. And that means investing money in stocks both when the market is doing well and when the market is bad.
In fact, a good strategy to employ is averaging, where you commit to investing at set intervals, regardless of market conditions. If you have a 401(k) plan through your employer, it’s easy to stick to this strategy by automatically allocating contributions to your retirement savings from your paychecks.
Investors who use cost averaging often end up paying a lower average cost per share for the stocks they buy than investors who try to time the market. And so it is worth sticking to this system yourself.
So here’s how the cost averaging might work in practice. Let’s say you’re not one to manually select individual stocks, but prefer to load index funds into your portfolio instead. You can decide to buy $500 worth of S&P 500 index fund stocks each month. If you have a 401(k) plan, you simply sign up to have $500 deducted from your monthly earnings.
Meanwhile, if you’re funding a brokerage account, you simply pick a date each month and transfer over $500 to invest. By sticking to a specific date, you don’t have to worry about the performance of the stock market at that specific time.
Investing money regularly is a great way to grow your wealth and achieve your financial goals. So rather than focusing on the exact performance (or not) of the stock market, commit to a regular investment schedule and trust that this approach will work.
Also remember that when it comes to building wealth, one of the most important things you can do is give yourself plenty of time to reap the benefits of compound returns from your retirement plan or from your brokerage account. And staying out of the market when it is particularly bullish or bearish could mean missing that opportunity.
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