The following is a guest post by R.J. Weiss, Certified Financial Planner™, who blogs about building wealth and living the good at The Ways to Wealth. If you’d like to guest post on Money Q&A, check out our guest posting guidelines.
The Dow Jones Index recently reached 20,000 for the first time. Never before has the stock market reached a higher valuation. Yet, it’s easy to remain quite pessimistic about the future. And, when there is fear about the future, it’s harder to make good decisions today.
One of those decisions is committing to invest in stocks. With the stock market at all-time highs, it’s common to think:
“I’ll just wait to invest until the market corrects itself”
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The issue is many of us have been waiting for a stock market correction for years, and therefore, missing out on recent gains.
Should You Wait for the Stock Market Correction Before Investing?
So, what should an investor do? The longer stocks increase, the closer we’re to the market correcting itself. The problem is we don’t know when and how much of a correction will come.
Then, there is the stress factor. If investing in stocks will decrease your quality of life, you must decide whether it’s worth it.
If this sounds familiar, there are four options to consider:
- Do nothing, waiting to the market corrects itself
- Invest in something else
- Systematically invest
- Invest it all
What you want is a plan of action, in which you understand the potential range of outcomes. What you don’t want is to live with regret in the future about your actions or lack thereof. Let’s review the pros and cons of each option so you can make the best choice for your current and future self.
#1 – Do nothing, waiting to the market corrects itself
- You potentially get a better value for your investment
- We don’t know if stocks will ever reach values lower than today’s
- If there is a market correction, you must actually pull the trigger and invest
When does doing nothing make the most sense?
First, it’s difficult to time the market. Not only do you have to wait it out, you have to buy at the right time.
Second, history tells us stocks have a greater chance of increasing then decreasing.
Third, there are other investments besides stocks which can give you a return.
# 2 – Invest in something else
- Other investment classes may provide you a better return at a better value
- You’d miss out on the gains of the market, which historically have been the highest among traditional investment classes
The stock market doesn’t have a monopoly on investments. There are other ways to invest and grow your money.
Alternative investments, and the ones I would focus on first, would include:
- Paying off your mortgage or student loans
- Investing in real estate
- Making an investment in yourself, such as an advanced degree to increase your salary
Then, there is the opportunity to diversify your investments. For example, choosing a strategy that has you in a mixture of stocks and bonds. Each option can make sense in the right situation.
# 3 – Systematically invest
- You still get to take part in potential market gains, while reducing your risk
- If the market continues to climb, you’re buying stocks at a higher price in the future
- A market correction may happen after the time frame you choose to spread out your investment
Say you have $12,000 waiting to invest. Instead of investing it all at once, you invest say $1,000 a month for the next year (the longer time frame, the less risk).
By doing so you take part in market gains, yet reduce your risk (and potentially increase reward) if a market correction happens within a year. The risk here is if the stock market correction doesn’t happen. You then are stuck buying stocks at higher values.
Again, history tells us stocks have a greater chance of increasing then decreasing. Yet, this is still a wise choice for many who are waiting on the sidelines in fear of investing at all time highs.
# 4 – Invest it all
- You’re potentially buying stocks at market lows and maximizing your long-term gains
- A risk of a market correction and losing a significant chunk of your investment
Last, if you have cash you’re looking to invest in the stock market, you can simply make the investment. In other words, transfer that $12,000 all at once.
Mathematically, this makes the most sense. Emotionally, it may make the least sense. What’s important is that the risk here isn’t buying today. The risk is if you buy today and sell at market lows.
If you’re able to hold through a market correction and take part in the gains that eventually come, investing now may look like a small bump in 20 years.
I can’t blame anyone who is hesitant to invest in stocks at all-time highs. But it’s still no excuse to not have a plan. There are good, quality options to explore.
So, what do you think? Should you wait for a stock market correction before investing? Let us know what’s been working for you by leaving a comment below.
R.J. Weiss, Certified Financial Planner™, blogs about building wealth and living the good at The Ways to Wealth.