Is it time to invest again in the stock market?
Is it time to get back into the stock market? This is (by far) the question we are asked most lately. This makes sense: markets are rebounding in 2023, and FOMO (Fear of Missing Out) is setting in, especially for those that sold out in the 2022 route or banking crisis this Spring that (understandably) triggered PTSD from the Great Financial Crisis.
What game are you playing?
Let’s rewind and ask ourselves, but should market volatility and uncertainty cause us to sit on the sidelines in the first place? The answers to these questions really depend on the game you’re playing. What are your financial goals and time horizons? As humans, we are not emotionally equipped to handle short term pain for long term gain. We are a fight-or-flight species, after all, seeking immediate gratification and immediate relief. Successful investing, like a lot of things in life, requires us to disobey our biology and animal brains. To this end, a useful device can help in being more rational and raising the odds of longer-term success: buckets.
Think in terms of financial buckets, each with its own special purpose and timeline. While most will end up with at least several buckets, all will have two primary types.
Short-term bucket: (Safe) cash equivalents covering rainy day protection to known near term future spending—taxes, tuition, a down-payment on a house next year, etc. The best method of keeping cash safe and liquid is not through bank products like CDs but Treasury bills. Today, Treasury bills with next-day liquidity yield almost 5.5%.
Long-term buckets: Mostly likely, you should have more than one longer-term bucket. These buckets are for money you don’t need for at least 10 years but want/need to grow. Retirement, health care, and college savings plans for young children are but three common examples. For these buckets, you not only have to bear volatility, temporary losses, and discomfort—they are required costs you must pay to reap compounded returns and fulfill your goals (and making serious money) over the long term.
Organizing your buckets will naturally help you build a stronger, more confident, and longer-term perspective on investing. When you begin to understand that you can afford short-term losses with your longer-term monies, you are more able to handle market volatility and the emotional responses they induce. One caveat, though: it’s key to make sure you are allocating the right amounts in your longer-term buckets. Remember, amounts you put into longer-term buckets should be sensible and represent money highly unlikely to be needed anytime soon.
Awareness to Action
Once you determine the game you are playing, you should then make sure to match your investment strategy to it. Yes, a long-term perspective gives you peace of mind amidst uncertainty and volatility, but an appropriate investment allocation that aligns with those buckets will truly allow you to be confident and sleep well at night. A common mistake investors make in their longer-term buckets is not having enough in longer-term assets like stocks. (Just as common is being too aggressive with shorter-term money because “long term” is underestimated; the long term is not two years or even five years.)
Don’t let perfect be the enemy of good!
Let’s get back to the original question. Is it time to get back in the market (or is it too risky)? Risk can be a complicated topic, but for the investor with a long horizon, the riskiest move is being extreme, either by going full-tilt immediately or continuing to remain on the sideline in hopes of timing the market perfectly. Unfortunately, we know that emotional investing by fear and greed makes perfect timing practically impossible. Investing is not an all-or-none decision.
Instead of trying to be perfect, try to be approximately right. How? Have some in your longer-term bucket and add over time (accelerate this if markets fall). This is what is meant by “dollar cost averaging.”
Another useful and more effective tip is to invest in good assets you understand. Remember, stocks are fractional ownership in real businesses. Buy good businesses that will not only survive for a long time but are also special and deserving of future growth and prosperity. Coping with falling stock prices is easier when you ask yourself if the longer-term prospects of the business have actually fallen.
