U.S. markets have been riding a wave of optimism so far in 2023. After weathering the turbulence of a bear market in 2022, investors have been greeted with a rejuvenated marketplace this year.
Two major indexes, the S&P 500 and the Nasdaq 100, stand testament to this recovery. As of August 17, they are up by an impressive 15% and a staggering 36%, respectively. Such outperformance, interestingly, has been led by a handful of mega-cap tech sector stocks.
Given this upward trajectory, it’s a pertinent question many investors are grappling with: Is it safe to invest in the stock market right now?
It’s only natural to be hesitant. After all, nobody likes to buy at the perceived top. The fear of investing at the peak only to watch your investments tumble thereafter is a common concern.
But the truth of the matter is, while timing the market can offer short-term gains, in the long run, it’s the consistency and duration of your investment that truly matters.
The wrong question to ask
At face value, asking, “Is it safe to invest right now?” seems like a reasonable inquiry. However, on closer inspection, it’s revealed to be a bit of a misstep, and here’s why.
I hate to break it to you, but very few people, even the most seasoned financial analysts, can predict with absolute certainty the short-term movements of the market. Asking if it’s safe to invest “right now” assumes a level of precision in forecasting that simply doesn’t exist.
Moreover, the stock market tends to reward long-term investors. By focusing on the immediate perceived safety of the market, one might miss out on the broader, often more rewarding, long-term perspective. Historically, despite short-term volatility, the market has shown an upward trajectory over extended periods.
Finally, waiting for the “right” or “safe” moment might lead to missed opportunities. The market has its ups and downs, but by staying out, you might miss periods of significant growth. Additionally, even in downturns, there are sectors or stocks that outperform and offer substantial returns.
What you should be asking instead
The term safe is subjective. What’s safe for one investor might not be for another. Instead of seeking a universally “safe” time to invest, it’s more beneficial to determine what’s suitable for your individual circumstances.
You need to understand two key concepts: risk tolerance and time horizon.
- Risk tolerance: This refers to your ability and willingness to endure fluctuations in the value of your investments. Everyone’s comfort level with potential losses is different. Some investors are more conservative, preferring more stable investments, while others are more aggressive — comfortable with the prospect of higher returns at the cost of higher volatility.
- Time horizon: Your time horizon is essentially how long you can keep your money invested without needing to access it. An investor saving for retirement in 30 years has a longer time horizon than someone saving for a down payment on a house in five years. A longer time horizon can often afford a bit more risk since there’s more time to recover from potential market downturns.
If you’re a long-term investor willing to stay the course, considering a diversified approach can be particularly beneficial.
For instance, index ETFs such as BMO S&P 500 Index ETF and BMO Nasdaq 100 Index ETF (Hedged to CAD) offer a broad exposure to a range of companies.
Once you have the core of your portfolio in place, then you can consider picking a few stocks (and the Fool has some suggestions below).
