You may be wondering if investing when the stock market is at or near its all-time high is a good idea. Before deciding, it is worth considering two factors: your risk tolerance and your time horizon. It’s also worth considering what resulted from investments at previous historic highs. Historically speaking, there has rarely been a bad time to make money work assuming it is money meant for long-term investing.
Here, we’ll go through some of the most important factors in deciding whether you should really invest in the stock market right now.
Your risk tolerance
Some people have an insatiable tolerance for investment risk: no amount bitcoins tokens or GameStop the stock is sufficient. For others, it is quite the opposite. No matter what type of investor you are, you need to weigh risk from the perspective of your entire portfolio. That is, you should consider your the whole financial situation then assign the risk from there.
Next, know that there are two key attributes of risk tolerance: your capacity take risks and your will to take risks. You might be a multimillionaire with an above average ability to take risks, but you might not have the willpower to take it because you don’t think there is much to be gained as a result. In another case, you might have a very strong willingness to take risks but have other obligations that prevent you from adopting such a strategy. Simply put, risk tolerances vary widely.
There is also a psychological risk when it comes to investing: some people literally cannot sleep at night knowing their money is at risk of losing value. Stock market risk most often comes in the form of volatility, or the tendency of investment values to fluctuate in both directions (at least in the short term). While it’s a bit trendy to ignore the importance of being able to sleep at night, you would do well to exercise caution before taking on more risks than you personally can bear.
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Your investment horizon
Regarding the time horizon, you should only invest in the stock market money that you do not need to at least three years – some people even advocate five years as a minimum period. Either way, if you plan to use the money six months from now for a down payment on a house or a big tuition bill, you shouldn’t invest it in the stock market.
One of the keys to determining your time horizon for various compartments of money is to create an asset allocation as part of a comprehensive financial plan. You can start with an emergency fund – money meant to cover short-term expenses in the event of job loss or other emergencies.
From there, you can build a portfolio of stocks, bonds, and other investments that reflects your ability to take risks over specific time periods. Money from a child’s education fund meant to be used decades away can be put into a long-term account, while money meant for a home renovation next year will require management at short term.
In short: a long-term horizon – say, at least five years – is a sign that you are ready for an investment in the stock market.
What if the market is at an all time high?
Bear in mind: the fact remains that over long periods of time, the stock market has rarely lost money. If you had invested money at all of the previous all-time highs – despite the insane volatility often found between the two – you would have taken the edge. You may have even gone out very far ahead depending on the specific period in which you started.
Investing now has some important advantages. First, the sooner you invest, the sooner you will be eligible to collect dividends, for example, and accumulate more stocks. This is the very essence of the composition. By composing the value of assets, you will be surprised at how quickly your money can grow.
Then Invest Now will begin your holding period for preferential tax treatment on long-term capital gains. Long-term capital gains rates reward investors who have held stocks and bonds for more than a year. Over time, you want most of your income to be taxed at as low a rate as possible – the sooner you start investing, the sooner it will happen.
Invest, but have a strategy in place
The stock market – without a doubt – can make you a very wealthy person if you stick to the basics. Invest early and often, sell only when necessary, and focus on the long term. But before you do, be sure to take a deep look at your overall financial situation and be completely honest with yourself about your risk appetite as well as your relevant investment time frame. If all goes well, continue with confidence and invest now.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
