- Maximizing Your Investments: Top Assets for Small Budgets - June 20, 2023
- Investing Made Easy: A Beginner’s Guide to Index Funds - March 30, 2023
- Do Index Funds Have Fees? [Don’t Overpay] - March 21, 2023
On September 21, 2022, the FED announced another interest rate hike of 75 basis points (0.75%), the fifth one this year alone.
Inflation hit 9.1%, the highest annual increase since the 1980s.
The stock market has been plummeting ever since the start of 2022.
Everything seems like it’s pointing to a recession, but now is a good time to invest in the stock market for the long term!
Why, you ask? I will break down everything you need to know in today’s post.
Why Is Now A Good Time To Invest?
The stock market is down 23% from its all-time highs, which means you can buy shares of the same businesses for a great discount. History has proven to us that the stock market always recovers and soars to new highs.
1. You are buying the same businesses for a cheaper price
Think of all the successful companies in the world.
Apple, Tesla, Microsoft, Amazon, Google, Meta (Facebook).
These are well-established businesses that have seen success on a global scale. They continue to grow, innovate, and produce revenue year after year. Will the businesses change just because their stock prices drop? No. The market is emotional and overreacts to things that won’t matter in 5-10 years.
You need to focus on the long-term growth of these companies. If they are promising companies that show potential to prosper long into the future, it may be in your best interest to ignore short-term market fluctuations and continue to invest.
If the market has dropped, you can buy the same businesses of the equivalent value for a cheaper price. Why wouldn’t you scoop up some more shares while they’re cheap?
Let’s say for example you need a new pair of shoes. You’ve been doing a lot of research for the past couple of weeks for the best pair of shoes and decided to buy a pair from Nike. Although they are a bit pricey, you decided that the price is worth the product, because the quality and comfort of the shoes meet your needs.
All of a sudden, the store announces a big sale. The shoes you were going to buy are now 30% off. Would you still buy it? Of course! You’d probably go to the store right now before they go out of stock.
The only thing that changed is the price. Does the price decrease mean that the shoes are of lesser quality or are less comfortable? No. They still carry the same quality you initially sought. If you can get the same thing but for a cheaper price, of course you are going to get it.
On the other hand, what if the price increased by 30%? Would you still buy it? You might reconsider. You are getting the same quality and comfort for a much more expensive price. You might even look for a cheaper pair.
Why should this concept be any different for stocks?
When it comes to the stock market, people chase stocks that have already soared up in price. The more expensive the stock gets, the more people buy in hoping to catch a portion of the profits.
When the stock drops in price, people panic and sell. They get rid of all the shares they had before they lose more money. Why do such a thing, when the business is fundamentally still the same?
The way we look at discounted items at the store and stocks should be equivalent. If we know the true value of the company, we should be eager to buy more shares while they’re cheap.
Now, of course, there are some exceptions to this. Sometimes the price of a stock will drop due to changes in the business’s fundamentals like poor management or constantly missing earning expectations.
Ultimately, you need to learn how to be more rational when it comes to stock market investing. Prices fluctuate, but your emotions should not. When the stock market drops, you should ask yourself, “has the business fundamentally changed in any way?” If the answer is no, why not buy some more shares at a discount?
2. The stock market has historically ALWAYS recovered
History has proven to us that the stock market recovers 100% of the time. Even after some of the worse financial crises, the worse housing market crash, and a worldwide pandemic, the stock market has always recovered. Not only did it recover, but it also soared to all-time highs. Therefore, a good time to invest is right now when everything is cheap.
Let’s take a look at the most recent COVID crash. The stock chart is provided by tradingview.com.
Looks pretty scary, huh? Well, look at how rapidly the stock market recovered.
Now let’s take a look at what happened to the stock market during the housing market crash in 2008. This crash was caused by banks lending out money to people who barely qualified. As interest levels rose, these people could no longer afford the rates leading to bankruptcy followed by the crash.
Again, the stock market recovered from this crash. This crash was much more prolonged, and it took a total of 17 months to get back to all-time highs. However, anyone with a long-term investment horizon should not be concerned with the recovery time. That’s more time for you to buy cheaper stocks!
You get the point by now. Stocks have historically always recovered.
There is always bad news out there saying how the stock market will crash. The news always shows “professionals” telling everyone to sell their stocks. But the stock market always recovered. The best you can do is ignore all the bad news and stay your course. After all, the news makes money off of their views, and the best way to get views is to put out attention-grabbing negative stories.
I would like to make a point about investing in bonds. Due to the volatile nature of the stock market, if you are closer to retirement you need to make sure you have enough bonds in your portfolio. This will tone down the volatility in your portfolio and avoid you losing your funds.
However, as long as you have a long-term horizon to invest (10-15+ years), you will do just fine. If the stock market starts to fall and you see your portfolio go down, don’t panic. Stay the course and keep investing. Take advantage of the discount you are being given.
A word on why the stock market is crashing
Now that you know why now is a good time to invest, I would like to share a word on why the market has been going down since the start of 2023.
Negative news usually causes the stock market to drop in price. With inflation at over 9% and continuous interest rate hikes, it’s no wonder the stock market has been dropping.
During the COVID-19 pandemic, the FED slashed interest rates to basically 0%. The FED was afraid that the pandemic would negatively affect the economy, so they wanted people to get out and spend money. By cutting interest rates so low, they thought this would encourage more people to spend than save. And it worked.
Fast forward to today, inflation is going out of control. The low-interest rate certainly has caused more people to spend, but the supply shortage happened. More people spending money on fewer supplies drives prices up, which in turn, causes inflation. It’s a simple supply and demand concept. Higher demand for fewer supplies results in higher prices.
Now the FED has increased interest rates in hopes to keep inflation under control. It’s like putting some grit in the wheels.
If interest rates are high, you might think twice before you get a loan and buy that house.
You might be less tempted to make that large purchase on your credit card.
Many Americans are feeling the pain of inflation. Although it may be hard to continue investing, try your best to stay the course.
Conclusion
Although the stock market continues to drop due to high inflation and interest rate hikes, remember to continue investing. To be a successful investor, you must remember to be rational in times of irrationality. Stay the course and follow the investment plan you initially created, and you will come out on top.
Thank you so much for reading. I hope I was able to provide you with some value today.
Please let me know what you think in the comments!