Why Americans are wrong to keep money out of a volatile stock market

If your favorite store was offering 13% off merchandise, chances are you’ll fill up your cart. But if you’re like many Americans, you might find that you’re not as keen on the markdown when it comes to buying stocks.

The S&P 500 – a common indicator of the broader US stock market – is down 13% in 2022, but people aren’t buying more stocks at cheaper prices. According to a recent Allianz Life survey, only 1 in 4 Americans say now is a good time to invest in the stock market, and 65% say they keep more money than they should out of the market for fear. investment losses.

These fears are not entirely unfounded: any investment can go down and investment losses can be painful, especially for people who plan to live off their investment income in the short term.

However, if you’re investing for a purpose years away, letting fear keep your money out of the market is a big mistake, says Kelly LaVigne, vice president of consumer insights at Allianz Life.

“When the market is good, people throw their money into it. When it’s bad, they keep their money out,” he says. “It does the exact opposite of what you’re supposed to do.”

Here’s why investment experts say it’s not wise to keep your money out of the market now, even if things look scary.

Young investors: time is on your side

Maybe you’re saving money because you’re waiting for the market to calm down. But unless you’re about to retire, you’re sacrificing your most valuable asset as an investor: time.

“The younger you are, the more you need to be in the market,” says LaVigne. This is because the further you stray from your investment goal, the more time your portfolio has to recover from market declines. And given the market’s long-term historical upward trajectory, starting earlier and staying invested means getting the most out of compounding returns.

Suppose a 22-year-old who plans to retire at age 67 initially invests $1,000 in the stock market, followed by $100 each month. If her portfolio generates a 7% annual return, she would retire with nearly $405,000, according to CNBC’s compound interest calculator Make It. If she starts only five years later and the other conditions remain the same, her total drops to $280,000.

Timing the market: “You will miss the rise”

“But wait,” you might be thinking. “I’m not going to wait five years to get my money back in the game. I’m just waiting for the market to bottom out so I can get it back up.”

Here’s the thing: to make long-term gains, you need to be invested on the best days of the market. And these often come right after the worst.

Over the 20-year period ending December 31, 2021, the S&P 500 had an annualized return of 9.52%. Remove the top 10 days from that period and the yield drops to 5.33%, according to JP Morgan analysis. During this period, seven of the best market days occurred two weeks after one of the worst 10 days.

“We have no idea where the bottom of this decline is, but we know almost for certain that if you keep money out of the market, you’re going to miss the upside,” LaVigne says. “The worst thing you can do is not be in the market when it starts to rally.”

Invest regularly in bear markets

No one likes the feeling of seeing big red numbers on their portfolio page. But if you’re investing for the long term with a broadly diversified portfolio, that’s not necessarily a bad thing, says Jeremy Finger, certified financial planner and founder of River Bend Wealth Management in Myrtle Beach, South Carolina.

“You should want the market to be down, down, down so you can buy at very low prices,” he says. “So if you could snap your fingers like a genius, you’d want the market to go up just before you retire.”

No one can magically control the stock market, but as an investor you can control how you handle its ups and downs. One way to avoid getting caught up in what the market is doing is to invest a fixed dollar amount at regular intervals. This strategy, known as dollar-cost averaging, virtually guarantees that you buy more stocks when they’re cheaper and fewer stocks when they’re more expensive – in effect, buying low and selling high.

Right now, the market is leaning more towards the “buy low” side, points out Aaron Clarke, CFP and founder of Gig Wealthy. “You get a great entry point for the next 30 years of investing,” he says. “And if it drops a little more, great. That’ll be an even better time to get your money in.”

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