In case you missed it, the stock markets have been climbing. In fact, the Dow, S&P500 and NASDAQ indexes hit all-time highs last week.
This brings up an interesting challenge for investors: Is now the right time to invest?
Unfortunately, there is no clear answer. Despite what analysts and financial gurus may tell you, there is no surefire way to predict the next market correction. It could be tomorrow. It could be years from now. So answering the question of when to invest is tricky. Perhaps the better question to ask is how should you invest?
Successful investing starts with a strategy. The first thing to consider is your time horizon. Investing is longer-term in nature. You wouldn’t plant a garden and expect to harvest it the next day. Similarly, you need to give your investments adequate time to mature. In the investment world, time is often measured in years. If you need access to your money in the next year or two, it’s probably best to look to the safety of a bank. If your time horizon is more like 5-to-10 years (or longer), the options open up.
The next consideration for investors is how much risk are you willing to accept? If you’re investing in stocks, bonds, mutual funds or similar risk-based assets, prices can fluctuate up or down over time. This fluctuation is commonly referred to as volatility. Volatility, in essence, is the amount of risk associated with your investment.
Part of the reason investors make money is because they take risks. The more risk one takes, the higher the expected return. Otherwise, why take the risk in the first place? But not all risks pay off. Positive volatility is the goal, but negative volatility is the down side. Before you start investing, it’s important to understand how much downside volatility or investment loss you’re willing to accept.
The biggest risk of investing today is timing risk. When you invest your money — and when you withdraw your money — can have a serious impact on your profitability. If the markets are at a peak and prices are going to begin to pull back, what can you do? Here are four elements to consider in your strategy:
- Make sure your investments are well diversified. Don’t put all your eggs in one basket. Instead, spread your risk across multiple investments. If one of your investments declines, perhaps the others will not. It’s no guarantee of success, but it helps reduce the odds of failure.
- Try to find investments that are non-correlated to each other. Correlation is when two investments act similarly. As an example, consider Home Depot and Lowes. Both are home improvement chains. Each business is separate, but they are in the same industry directly competing with one another. As such, they are both influenced by similar factors. The primary diversification difference is in the internal operations of the organizations. Otherwise, they are subject to the same macroeconomic sways. Investments that act like each other defeat the purpose of diversification.
- Allocate your investment dollars across multiple asset types based on your risk appetite. Think of risk like temperature. If you want a warm investment strategy, you could mix hot and cold investments together until the temperature is just right. The hot investments are higher risk, the cold investments are lower risk. And, just like diversification, you should spread your risks across different asset classes and types. This means mixing stocks, bonds, real estate, or other assets together in order to get to just the right temperature.
- Since the markets are at all time highs, consider easing into your investment strategy rather than dumping in all your money at once. Pushing all your chips onto the table just before a market pullback puts you at risk of losing value right out of the gate. Instead, consider spreading your purchase out over a period of weeks or months, investing portions over time. In this way, you get started now, but you can take advantage of lower prices if the market drops in the short term. If the market climbs, you only miss out on a little opportunity, but at least some of your money is working for you.
Ultimately none of us can predict the future, so a good investment strategy and some patience is required for success. And while there are no guarantees in the world (except death and taxes), the results for many long-term investors are encouraging. For over 100 years, long-term investors have weathered different presidents, political cycles, interest rate cycles, wars and more.
It seems reasonable to believe history will repeat itself on this one.