You need to start investing now. That advice might seem counterintuitive considering how volatile the stock market has been in the wake of the coronavirus pandemic, but it’s true. Even in these extraordinary circumstances, you can see your investments grow and set yourself up for a bright future.
Learn more about why you should be investing right now if you’re trying to figure out what to do with your money.
Last updated: June 24, 2020
Investing Is About the Long Term
After the S&P 500 reached the brink of disaster in late March — and the Dow Jones Industrial Average slid 1,800 points in June — you might have been tempted to sell all your investments and stash your money under your mattress. But don’t let these major dips rattle you. The truth is that investing is about the long term.
Adam Seessel, a portfolio manager, recently warned readers of Fortune about the dangers of “Chicken Little” thinking. Even though it might seem like the sky is falling right now, a business’ value is based on the long term.
The stock market has mostly recovered from those panic-inducing moments earlier this year, proving that the market will pretty much always return to normal — it might just take a while.
Time Is Your Friend With Compound Interest
Compound interest refers to the process of earning interest on top of interest and it can greatly amplify your lifelong earnings. If you start with $1,000, earn 10% interest per year for 30 years and then withdraw the interest earnings at the end of every year, you’ll end up with $17,449.40. Even in just 20 years, you’ll have $6,727.50. That’s pretty good for just $1,000.
Compound interest is a powerful force, but it takes time. The sooner you start investing, the better.
Stocks Are 'On Sale' Right Now
A lot of stocks are cheap right now. If you’ve been waiting to dip your toes into investing, or if you’ve been eyeing a particular stock, now might be a good time to pick it up.
It’s the stock market, so there is no guarantee things will go your way, but if you pay attention to diversity and research your options, you could pick a winner — or several.
Many Companies Are Going To Bounce Back
Things might look bleak, but many businesses are already demonstrating signs of recovery, while others are fairly consistent no matter what’s going on. Apple, Amazon and Google are a few examples of stocks that tend to weather the storm. Some businesses are even thriving because of the pandemic, like Zoom, which makes video conferencing software.
If trying to choose specific companies is stressful, consider investing in a mutual fund. Mutual funds are professionally managed, affordable and diverse. In other words, your eggs aren’t all in one basket.
You Have Time To Make Mistakes
The best investment plan is one that leaves room for error. The sooner you invest, the more time you have to recover from investment mistakes or an economic crisis. If you put all your money in the stock market right before a crash, you’ll have time to earn back that money — and more — if you start in your 20s. A 60-year-old investor, on the other hand, might never recover.
Starting Early Minimizes the Amount You Have To Save
Want to make investing less painful? Invest while you are young. If you want $1 million in your account by the time you retire at age 65, you’ll have to sock away $2,622.81 per month at 10% annual interest to hit your goal if you start at age 50. If you begin saving at age 20, that monthly contribution will drop to $115.92. While you’re likely to be earning more money at age 50 than at age 20, many people have the wiggle room to set aside less than $116 to become a millionaire in retirement. If not, find out what wiggle room you do have and get the ball rolling.
Even if it’s later in life, it’s never too late to start. Invest in the stock market in ways that make sense and put away money you don’t plan to use for a while. Pair that with a smart savings plan and you’ll be prepared for whatever comes your way.
The Market Is the Best Teacher
Financial education in the United States still has a long way to go. While plenty of information is available on the internet and from investment advisors, basic financial education still isn’t a mandatory requirement at most schools. While you can learn the basics of investing in a relatively short time, becoming an expert could take months, decades or even your entire life.
The sooner you start, the sooner you’ll be on your way to grasping the intricacies of stock price movements, the relationship between bonds and stocks and what risk and reward really mean when it comes to investments.
Investing Will Become a Habit
One of the witticisms that market pundits like to espouse is that “the best time to invest is now.” No one knows what the market is going to do from day to day. Over time, however, the stock market tends to follow the growth of corporate earnings, which in turn tends to trend upward over time.
If you invest regularly, the ups and downs of the market smooth out over time. If you start a regular investment plan now, it will soon become a habit. Before long, you’ll accept that part of your paycheck goes toward your investments.
It’s Never Too Late To Own Stocks
Lisa Brown recently reported in an article for CNBC that investors of every age can — and should — own stocks. You just need to consider how long you have until you’ll need to withdraw your savings.
In general, Brown suggests you’ll want:
- 80% of your investments in stocks when you’re in your 20s and 30s
- 70% of your investments in stocks when you’re in your 40s and 50s
- 40%-60% of your investments in stocks when you’re in your 60s and 70s
You may even want some stocks into your 80s and beyond, depending on whether you’re planning to leave money to your heirs.
It Offers the Opportunity for Diversification
Now is also a great time to consider how diversified you are. Do you have all your retirement funds in your 401(k)? Maybe it’s time to start a Roth IRA. Or it could be time to look at a new ETF or mutual fund.
A survey from Personal Capital found that those with three or more types of retirement income were far more likely to feel prepared. Look at your current investments and see where there’s room to grow.
You Can Let Technology Do the Work
Investing in 2020 is much different than investing in 2010. The “fintech” revolution is in full swing, and there are a multitude of technologically advanced ways to invest that your parents and grandparents could only dream about when they were 20. Robo-advisors such as Betterment allocate your money across a portfolio of funds suited for your investment objectives and risk tolerance. Automated transfers are offered by nearly every investment house and let you automatically divert a portion of your paycheck to a designated investment account.
Investing Is a Lifelong Process
A successful investment portfolio consists of more than just saving 10% or 15% of your paycheck. Over time, a sound financial foundation is built on having a multitude of financial bases covered.
Many financial experts recommend building an emergency fund to cover three to six months’ worth of expenses. After that, start saving for what your particular goals are, from college (for you or your children) to retirement or vacations. The sooner you start, the sooner you’ll be ahead of the game for each savings bucket.
The Market Looks Ahead
The market leads the economy, not the other way around. This is important to keep in mind if you’re hesitant about investing because the economy and the stock market seem drastically different.
In particular, the stock market acts as a “leading indicator” to the economy, according to a CNBC article by senior money writer Megan Leonhardt. This means that typically the market will start declining before a recession is noticeable, and it will start recovering months before the recession ends. It’s a good sign that the market has bounced back as quickly as it has.
This recession is also unique in that it was caused by something specific: the coronavirus. There’s been more economic help from the government and it will likely end when a vaccine is found. There’s no way to know when it will end, but it will end.
Recessions Don’t Last Forever
A recession might feel like forever. In reality, they typically last less than two years, according to Forbes.
In fact, in the 33 business cycles since 1854, the average length of a recession is roughly 1 1/2 years. But that number is jacked up a bit by the Great Depression, which extended over 3 1/2 years; the second-longest recession — in 2008 — lasted around 1 1/2 years, which tells you that it’s typical for them to be even shorter than that.
In comparison, periods of economic growth tend to last, on average, 3.2 years.
So, it might take a little time to see significant returns on your investments, and that’s okay. But it won’t be forever. Choose your stock market investments with the long term in mind.
Staying the Course Pays Off
“Fortunes are going to be made out of this time,” said Suze Orman on CNBC. Her advice was to take advantage of the current low stock prices and not to panic if you currently have money invested.
Orman said that there’s no way to know the top or the bottom of the market. The best advice is to not panic and continue to invest as you normally would. If you don’t normally invest, now’s a great time to start.
It’s Less Painful
The simple act of saving money can be far less painful when you start sooner rather than later. Start with setting aside what you can each month. When you get a raise or change jobs, take the increase in income and set that aside too.
Automatic savings tools can make the process easy. Many banks have automated savings, and robo-advisors do as well. With a robo-advisor, you can also automate your investments.
Ideally, you’d start with your first paycheck, but any start is a good one. Consider saving 15% of your earnings if you can.
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It's a Good Time To Take Stock of How You'll Reach Big Goals
To say things are unusual right now would be an understatement. Now is a good time to take a close look at your finances. Consider your income, your expenses and your goals.
Chances are, there are financial goals you’re still working on. Investing now can help make big financial goals achievable. Whether you’re saving for college, saving to retire as soon as possible or saving to pass money on to family, investing now gives you a chance to take advantage of future growth.
You Can Handle More Risk — and Possibly Earn Greater Rewards
Risk is an inherent part of investing. Often, however, with greater risk comes the potential for greater rewards. By starting sooner, you can afford to take greater risks to earn higher returns. If things go bad for you, you have time to kick in additional savings and wait for the markets to recover. If things turn out well, taking that additional risk while still young could result in a larger-than-expected investment nest egg.
You May Have More To Save
The pandemic has hit families in different ways. Some are finding that not having a commute and cooking more is leading to some savings. If you’re finding you have more in your pocket than usual, investing in stocks could be a smart choice.
You can turn the money you’re saving into a nest egg for the long term and pick up stocks at lower-than-usual prices.
Best Ways To Invest Money
The easiest way to get started investing is to participate in your employer’s 401(k) plan. This type of investment is easy to automate, usually offers a variety of diversified investment options and often comes with an employer match, which is essentially free money. From there, you can try to increase your savings in other types of accounts such as brokerage accounts or high-yield savings accounts. The key is to start saving as much as you can as soon as you can.
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This article has been updated with additional reporting since its original publication.
This article originally appeared on GOBankingRates.com: Why You Need To Start Investing In the Stock Market ASAP