When people get too pessimistic, I enjoy dishing out encouraging words to breathe life back into their lungs. On the other hand, when people become overly optimistic, I unfortunately have to be the one to bring them back down to Earth.
On August 30th of last year, I wrote that Stocks Will Rise and The World Won’t End. Since then, stocks have risen and the world hasn’t ended. Actually, stocks have risen a lot. And people are freaking out.
But who can blame them? You’re probably reading about or listening to TV personalities cheering on the Dow. In case you haven’t heard, it’s at an all-time high.
Stocks, Stocks, Stocks
I overheard a conversation the other day that went something like this:
Guy 1: “Have you seen the stock market?”
Guy 2: “Yea, I got out a few years ago, but I think I’m gonna get back in.”
Guy 1: “I know, I’m thinking the same thing.”
Guy 2: “It’s about time it’s back.”
Now that stocks prices have just about doubled, it’s time to get back in?
That seems smart.
It was an incredible conversation to listen to. These “investors” had it all figured out. They were burnt a few years ago when stocks took a plunge and they lost a lot of money. The lost money left an awful feeling in their stomachs, so rather than risking more money, they opted for more conservative options such as savings accounts and CDs. Now that stocks have rebounded, they feel that the trust is back.
This “logic” is extremely common, but it’s ASS BACKWARDS.
The Super Market
Picture yourself walking through the grocery store. We all have the usual items we buy, week in and week out. There are other goods we buy solely based on the price. If the price goes down, we buy more. If the price goes up, we buy less. If the price soars, we don’t buy any at all.
This is common sense in the supermarket, but why isn’t this same logic applied to the stock market?
Assuming you’re working (and saving), your stock market visits should be no different from your supermarket visits. Have a suitable amount of money automatically drafted from your paycheck and invest the money. If you put in $100 this week, put in $100 next week. It doesn’t matter whether stocks are going up or stocks are going down. If they go down, you’ll buy more shares. If they go up, you’ll buy less shares. This is simply called dollar-cost averaging.
Picture our above-quoted investors at the grocery store…
As the price of toothpaste drops to nothing, they suddenly decide not to brush their teeth. As the price starts to soar up to $5/tube, they start buying the entire shelf.
It doesn’t make sense, but it explains why (over the last 20 years) the stock market has averaged 7.8% while the average investors returned 2.1%.
So what about now? Is NOW the right time to invest in stocks?
I can’t say it any better than the Free Financial Adviser put it: “yes, now’s the time to invest. But so was yesterday and the day before and so it will be tomorrow.”