It never ceases to amaze me how when a stock is up 400% in a year, everyone desperately wants to buy it, and then, when it is on-sale 80%, no one wants to touch it. -- @Peter_Atwater on Twitter
The reason so many stocks -- belonging to both wonderful and not-so-wonderful companies -- have fallen sharply over the past year and remain down is explained by Mr. Atwater above. We enjoyed a bunch of years of stocks going up, up, and up -- reflecting a lot of people buying shares -- but now that many stocks have crashed, people are staying away.
Image source: Getty Images.
As I write this, the stock market, as measured by the S&P 500 index of 500 big American companies, is down about 23% from its 52-week high. That's a fairly big drop, enough to rattle many investors and would-be investors and cause them to wonder whether they should really be buying stocks now.
The answer to that question is yes -- it's a great time, for most folks, to be buying stocks.
Why buy stocks now?
A key reason to buy stocks right now is because so many great growth stocks are on sale. It's odd but true, as the tweet above notes, that many people are afraid to buy into the stock market when it's down, but that's generally the best time to do so. Remember that after every market correction and crash, after every recession, our economy and the stock market have bounced back. Check out some history:
|
Year |
S&P 500 Return |
|---|---|
|
2008 |
(37%) |
|
2009 |
26.5% |
|
2010 |
15.1% |
|
2011 |
2.1% |
|
2012 |
16% |
|
2013 |
32.4% |
|
2014 |
13.7% |
|
2015 |
1.4% |
|
2016 |
12% |
|
2017 |
21.8% |
|
2018 |
(4.4%) |
|
2019 |
31.5% |
|
2020 |
18.4% |
|
2021 |
28.7% |
|
2022 |
(21%)* |
Source: Slickcharts.com. Returns reflect reinvested dividends.
*Year to date as of October 18, 2022.
You don't even have to make it complicated. You can do well just parking your money in one or a few low-fee index funds. Add money regularly, and it can all add up rather impressively, as the table below shows. (It assumes an average annual growth rate of 8%. Your own average might be higher or lower.)
|
Growing at 8% for |
$5,000 invested annually |
$10,000 invested annually |
|---|---|---|
|
5 years |
$31,680 |
$63,359 |
|
10 years |
$78,227 |
$156,455 |
|
15 years |
$146,621 |
$293,243 |
|
20 years |
$247,115 |
$494,229 |
|
25 years |
$394,772 |
$789,544 |
|
30 years |
$611,729 |
$1,223,459 |
|
35 years |
$930,511 |
$1,861,021 |
|
40 years |
$1,398,905 |
$2,797,810 |
Source: Calculations by author.
The argument for holding off on buying stocks now
Of course, there's no one-size-fits-all answer to the question of whether you should buy stocks now. Some people should not.
You might stay away from the stock market if:
- You are so new to investing that you're not comfortable with the idea and aren't sure how to go about it. (If that's you, start reading up on investing in stocks.)
- You're not ready to invest because you're saddled with high-interest rate debt and/or no emergency fund.
- You will need the money you plan to invest in the next five, if not 10, years. Remember that the market can drop any time, and you don't want it to do so right before you were going to sell for a down payment on a home.
So go ahead and consider investing in stocks right now, because it's hard to find a better way to build wealth over the long term. Remember that Social Security is not likely to provide enough retirement income for most of us, so it's important to save and invest for our futures.
