Stocks have mostly been on a tear since last year's COVID-19 crash. Though there have been a few bumps, the S&P 500 index is up about 110% since bottoming out on March 23, 2020.
History tells us that we're due for a correction. Between 2000 and 2019, a stock market correction (a decline of more than 10% but less than 20%) or crash (a drop of 20% or more) happened in 11 out of 20 years. If you're worried about your investments losing value, you could be tempted to wait things out. On the flip side, if you're looking for a buying opportunity, waiting to buy the dip may sound appealing.
But even though another correction is inevitable, now is as good a time as any to invest in the stock market. Here's why.
Image source: Getty Images.
The stock market is a predictable wealth builder
If you're looking for the closest thing to a surefire investment, look no further than S&P 500 index funds. They track the performance of the S&P 500 index, which is made up of 500 stocks issued by some of the largest and historically profitable companies in the U.S. Overall, those stocks account for more than 80% of the U.S. stock market.
Since 1971, the index has produced positive returns in 40 out of 50 years. But your odds of profiting are even better in the long run. Over a 20-year holding period, the index has never produced a loss. When you look at stock market returns over multiple decades, even major drops look like a blip.
Timing doesn't matter that much
The timing of your investment matters a lot less than you'd expect. Consider the performance of five hypothetical investors' portfolios in a study by Charles Schwab. Four of these imaginary people invested $2,000 a year in the S&P 500 index over 20 years -- $40,000 total -- between 2001 and 2020, while a fifth avoided the stock market and stuck with U.S. Treasury bills:
| Investor | Investment timing | Portfolio value after 20 years |
|---|---|---|
| Peter Perfect | Invested at the market's lowest point for all 20 years. | $151,391 |
| Ashley Action | Invested on the first trading day for all 20 years. | $135,471 |
| Matthew Monthly | Divided $2,000 into 12 increments and invested at the beginning of the month for 20 years. | $134,856 |
| Rosie Rotten | Invested at the market's peak for all 20 years. | $121,171 |
| Larry Linger | Avoided the stock market and kept his money in U.S. Treasury bills for 20 years. | $44,438 |
Data source: Charles Schwab.
Unsurprisingly, perfect market timing achieved the best results. Of course, that's impossible for investors to achieve. But even Rosie Rotten, who had the terrible luck to invest at the market's peak for 20 years straight -- which, fortunately, is also unlikely to happen -- still tripled her principal.
The only truly unlucky investor was Larry Linger, who stayed out of the stock market altogether. By keeping his money in U.S. Treasury bills, his money actually lost value because it didn't earn enough to keep pace with inflation.
Set aside cash for the next correction
While you shouldn't wait for a crash to invest, setting aside extra money so you can pounce on an opportunity is a smart move. Try deciding what your strategy will be now. That way, you're not making decisions based on emotions -- which during a crash can come in the form of sheer panic or fear of missing out.
For example, you could decide to invest extra in an index fund any time the S&P 500 drops by a certain number of points. Or you may opt to invest in certain individual stocks if their prices falls below a predetermined level.
When should you avoid stocks?
You'll want to have at least a three- to six-month emergency fund before you start investing. Doing so protects your investments. If the market drops right after you lose your job or have some ill-timed expense, you won't have to cash out before your portfolio recovers. Paying off credit card debt also makes sense, because the interest rate you pay is often higher than the average stock market return.
But as long as your finances are in good shape, don't avoid the stock market. If you're focused on the long term, now is always a good time to invest.
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