When it comes to investing, people often ask, “Is it a safe time to invest right now?” In my opinion, that’s a very fair question. However, it’s nearly impossible to know how the stock market will move over the long term, or even in the short term, for that matter. Looking at the performance of the TSX since the start of the year, we can see a modest 3% growth. I (or anyone you ask) won’t be able to definitely say that the stock market will continue to rise through the rest of the year.
Because of that, investors should instead be asking, “How should I be investing right now?” In that case, I have a few tips that can help you get on the right path.
Invest what you can
First and foremost, only invest the money you can afford to risk in the stock market. As a general rule of thumb, investors shouldn’t use money they think they’ll need over the next three years. This is crucial because you wouldn’t want to have money tied up in the stock market if you plan on using it for a big purchase in the near future.
One reason for this is that the stock market is very volatile. If it encounters a tough economic period, you could be looking at major losses that you wouldn’t want to lock in via a sale of your shares. With that said, always keep in mind what purchases or needs will come up from year to year and make sure you set money aside for that.
Be consistent with your contributions
Next, it’s important to be very consistent with your contributions. By this, I mean don’t buy shares one month and then skip four or five months before buying anything else. You should aim to be investing each month. This will allow you to slowly build your positions and average out your purchases over a long period of time.
Buying consistently also implies that you won’t be holding out to “buy the dip.” By that, I mean investors shouldn’t wait for a market crash to buy shares. Again, we don’t know how the market could move over the long term. So, you could be sitting on the sidelines for a long time before finding an opportune moment to buy shares.
Being consistent with your contributions will allow you to dollar-cost average (DCA). The hope with that is that over time, your purchases will fall during dips, high periods, and mid periods, resulting in a fair purchase price over time.
Only buy companies you understand very well
Finally, regardless of what the stock market looks like, investors should only buy shares of companies they understand well. You should know what a company’s business model looks like, how they make money, how they differ from competitors, and what kind of advantage they have over their peers. There are many more factors that investors should consider, but by understanding those four initial factors, you could get a good idea of what that company’s about.
Having a certain level of knowledge about a company could also make you more confident in it should the stock market enter a downturn. It’s far too common for investors to start selling off shares at a loss during market downturns because they’re holding shares of companies they aren’t very knowledgeable about or confident in.
Foolish takeaway
It’s impossible to know whether it’s a safe time to invest in the TSX right now. We know that the index has increased 3% this year, but it’s unclear whether it’ll continue to do that moving forward. Instead, investors should focus on investing what they can, being consistent with contributions, and only buying companies they understand well. By sticking to those fundamentals, I believe any time is a great time to invest in the TSX.
