After plunging into a bear market earlier on in the year, in early August, the Dow, Nasdaq, and S&P 500 regained some of the value they previously shed. In fact, some investors are hopeful that the current bear market rally will continue, allowing their portfolios to recover from the hit they took earlier on in the year.
Unfortunately, it’s too soon to determine whether our bear market is really over. And stock values could very well take a backward turn in the coming weeks.
But whether we’re looking at an extended rally or yet another decline, if you’re wondering whether it pays 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 make the case to stop investing when markets rally and when they decline. In the former situation, you might hold off on investing because you want to buy at a low. And in the latter scenario, you might shy away from investing when market conditions are volatile and you’re afraid of bearing further losses.
But in reality, it’s a good idea to commit to a consistent investing schedule and stick to it. And that means putting money into stocks both when the market is doing well and performing poorly.
In fact, a good strategy to employ is dollar-cost averaging, where you commit to investing at preset intervals, regardless of market conditions. If you have a 401(k) plan through your employer, it’s easy to stick to this strategy by allocating contributions to your retirement savings automatically from your paychecks.
Investors who use dollar-cost averaging often end up paying a lower average cost per share of the stocks they acquire than investors who attempt to time the market. And so it’s worth sticking to that system yourself.
So here’s how dollar-cost averaging might work in practice. Let’s say you’re not the type to hand-pick individual stocks, but rather, you prefer to load up on index funds in your portfolio. You may decide you want to buy $500 worth of S&P 500 index fund shares every month. If you have a 401(k) plan, you simply sign up to have $500 deducted from your earnings monthly.
Meanwhile, if you’re funding a brokerage account, you simply pick a date every month and transfer over that $500 to invest. By sticking to a specific date, you don’t have to stress yourself out about the stock market’s performance at that exact moment.
Keep at it
Investing money consistently is a great way to grow wealth and meet your financial goals. So rather than focus on exactly how well (or not) the stock market is doing, commit to a regular investing schedule and trust that that approach will work.
Remember, too, 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 compounded returns in your retirement plan or brokerage account. And sitting out the market when it’s notably up or down could mean missing out on that opportunity.
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