Don’t wait for stocks to bottom. Here’s the best way to buy into the market amid volatility
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The market strategists expect markets to reach a bottom but cash-strapped investors should move on and purchase stocks. Indeed, the S & P 500 was down more than 16% from its record high at Friday’s close, while the Nasdaq Composite was off about 27% from its all-time high. Although stocks rallied on Friday, they were negative for the week. This raises questions about whether or not this new bounce is a sign of a shift in market sentiment. Josh Brown CEO, Ritholtz Wealth Management said “You should never stop buying.” It is not a good idea to wake up each day asking yourself whether this day is the best day for you to purchase. This is how to start if your waiting has been too long to invest in stocks. Know your goals Investors need to be aware of what their time frame is. You may find that dollars saved for the longer term are better equipped to weather volatility. Cash or fixed income instruments should be used to hold money for the short term. Money needed quickly in the future can also be stored in cash. The way you go about returning to the market is also important. If you don’t have enough cash, you could either dollar-cost average your investments into stocks or make a lump-sum investment. Northwestern Mutual’s 2021 study found that investing $1 million in stock funds in one lump sum and 100% in stock investments yielded better cumulative total returns over ten years than dollar-cost average almost 75%. However, don’t overlook the benefits of dollar-cost average. The pressure of timing your investments is removed by automating small purchases in the market. “The way we express humility with investments is to diversify not just within the investments but also your timing – and that’s what you do with dollar cost averaging,” said Christine Benz, director of personal finance at Morningstar. You never buy the perfect time but you don’t buy the wrong thing at the exact right time. What are you going to buy? Investors who are returning to the market need to decide where they will invest their money. Ritholtz’s Brown says that bull market’s past leaders won’t be the ones leading the pack again in the next upturn. According to Brown, “I believe that in such a market it is smart to seek out areas where relative strength has been demonstrated compared with the rest of market.” These stocks are those that fall the most on extremely red days. Brown stated that energy stocks are the same as oil and gas companies. On that same list, Brown highlighted the high quality dividend paying companies, low cap value and defence contractors. If you’d rather not pick through individual stocks, consider aiming for broad diversification through cheap exchange-traded funds – or even balanced funds or target-date funds, if you’re truly hands off, said Morningstar’s Benz. She said that target-date funds are buyers of down market stocks and will maintain a target allocation. They are there for the good days and top up equity exposure. This is not something that individual investors would be inclined to do.
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While market strategists wait for the markets to bottom, investors who are sitting on cash should get up and invest in stocks.
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