1 reason to avoid the stock market and 3 good reasons to invest

1 reason to avoid the stock market and 3 good reasons to invest
1 reason to avoid the stock market and 3 good reasons to invest

It’s a nerve-wracking time to be an investor, so if you’re feeling anxious about the stock market, you’re not alone.

Several recent events have caused concern for many investors – including the collapse of Silicon Valley Bank and crypto exchange FTX, and threats of an upcoming recession. The general market volatility of the past year has also worried many, and it can be tempting to press the pause button to invest until further notice.

Sometimes that’s not necessarily a bad thing. In other cases, however, it is better to continue investing despite these troubling events. Here’s how to decide what to do.

Person with a worried expression sitting in a chair.

Image source: Getty Images.

When should you consider avoiding the market: You have no emergency fund

If you’re a long-term investor, volatility in the coming weeks or months isn’t too worrying. As long as you leave your money in the market until prices recover, you can simply ride out the storm without experiencing any losses.

But if you invest all your spare cash and then run into an unexpected expense, it can be costly.

No one knows for sure how the market will perform in the short term, and there is a chance that share prices could fall further. If prices fall and you suddenly need the money you’ve invested, you may have no choice but to sell your investments at a discount and lock in those losses.

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If you’re going to continue investing right now, it’s a good idea to make sure you have at least a few months of savings in an emergency fund. That way, if you encounter an unexpected expense, you can cover it without having to touch your investments.

Why now might be a smart time to invest

1. Prices are lower

If your finances are in good shape and you have a healthy emergency fund, right now can be a fantastic time to invest – even if more volatility is on the way.

Share prices are lower than they have been for a long time. Some stocks are down 50% or more from their peaks a year or two ago, meaning now is a smart time to load up on quality investments at a much lower cost.

It can be scary to invest below the market’s low points, especially if prices fall further. But this strategy can save you a lot of money over time. If you only invest when the market is booming, you’ll pay a premium for your stocks and spend far more than you need in the long run.

2. You can set yourself up for lucrative income

Buying during downturns can also put you in an excellent position to see significant returns when the market inevitably recovers.

Say, for example, that you have invested in Amazon in 2008, at the height of the Great Recession. At that point, the price had fallen more than 65% from its peak, and it may not have seemed like the best time to buy.

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But if you had bought below the low and just held your investment, you would have seen a return of over 370% in just the next two years. Within five years, this return would have skyrocketed to 935%

AMZN chart

AMZN data by YCharts.

Of course, not all companies will experience Amazon-like returns. But the best way to maximize your earnings in the stock market is to invest in quality stocks when prices are lower, and then hold those investments through the recovery.

3. You don’t want to miss the next bull market

Timing the market effectively is almost impossible, because stock prices can be unpredictable in the short term. While we know that a bull market will come to an end (no downturn can last forever), it is unclear exactly when it will begin.

Also, because the market is constantly fluctuating, we may not even know that a bull market has begun until we are months into it. If you wait until the market is well into investing, you may be wasting valuable time.

For example, say you had invested in one S&P 500 index fund in January 2009, just before the market officially bottomed. At the time, it may have seemed like a terrible idea, as prices remained volatile throughout the following months. But at the end of the year, you would have made a return of more than 23%.

^SPX chart

^SPX data by YCharts.

Instead of investing in January, however, say you waited until August, when the market was already well into the upswing. While that may have seemed safer, you would only have seen a return of around 13% by the end of the year.

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The market may face more volatility in the short term, but that doesn’t mean now is a bad time to invest. By choosing quality stocks and holding for a long time, you are far more likely to make money in the stock market.

John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Katie Brockman has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.

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