Is Now a Good Time to Start Investing?

Is Now a Good Time to Start Investing?

“Is now a good time to start investing?”  It’s a simple question, but it’s almost impossible to answer because it requires a market prediction. Most people agree that trying to predict the market is impossible, but it’s human nature to try to buy at the “right time.”

Of course, waiting to invest your money has an opportunity cost. Over the last several years, some investors have kept their portfolios in cash, waiting for things to look better.  Unfortunately these investors missed out on one of the greatest market recoveries in history.  For instance, in 2009 many investors felt the market was too risky and chose to sit on the sidelines until the financial crisis subsided.  In 2010, it was the recession.  In 2011, investors held cash because of the Japanese nuclear disaster & turmoil in the European banking system.  In 2012, the crisis du jour was the election and fiscal cliff.  Today, the primary reason that some people prefer to hold cash rather than stocks is the government shutdown and the ongoing debt ceiling debate.

Some investors have been waiting to buy at the “right time” for several years.  Sadly, waiting to invest their portfolios has cost them dearly.  Here’s what the S&P 500 has done over the last 5 calendar years:

Year 2009:           +26%

Year 2010:           +15%

Year 2011:           +2%

Year 2012:           +16%

2013 YTD:           +20%

Total Compounded Return from 2009 – 2013, 3rd Quarter:  106.49%*

History lessons aside, the question is always the same… “Is now a good time to start investing?”  Rather than trying to predict how the market will react to the latest political whirlwind (which is impossible to do), I’d rather answer the question by reframing the conversation.  Here’s how the conversation typically goes…

Client: I’m really worried about this (insert latest crisis here) that I saw on the evening news last night.  Do you really think that it’s a good time to start investing? It’s scary out there!

Advisor: That depends on how soon you might need this money.  Do you plan on investing it to fund your long term goals like retirement, or do you plan on needing this money over the next 1 – 5 years to buy a car, take a vacation, etc.?

Client:  My objectives are long term and my primary goal is to make sure that I don’t outlive my money.  I need this money to grow over the long term so that it can produce an income for me when I retire.  I don’t plan on touching it until then and I hope to supplement my income from the portfolio once I’m retired.  I’m just spooked by all of the talking heads on the news.  You’d think it was Armageddon every single night!

Advisor: That’s a great point.  The nightly news can be quite dramatic; however, it’s important not to lose sight of your long term objectives.  In your case, it really doesn’t matter what the market does in response to the (insert latest crisis here).  What matters more is where the market is when you need to sell.  Do you think the market will be higher or lower when that time comes?

Client: I suspect it will be higher since we’re talking about 5, 10, or even 15 years down the road.  I’m only 60 years old, so I might need my portfolio to support my living expenses for another 30+ years.

Advisor: I agree.  Over the long term markets tend to go up.  Rather than basing your investment plan on unpredictable short term market movements, let’s design a diversified portfolio around your specific long term goals and objectives.  And remember, we also tailor the plan to minimize your risk exposures to the (insert latest crisis here) by diversifying into multiple asset classes like stocks, bonds, hard assets and alternatives.  As time goes on, we’ll make changes to the portfolio as your investment time horizon and risk tolerance change.

Client: That makes sense.

-Heath Hightower, CFP®

*Sources Used:  Morningstar Workstation®, Performance data is through 9/30/2013

Heath Hightower

Heath Hightower

As a CERTIFIED FINANCIAL PLANNER™ professional, Heath believes in giving solid, unbiased advice, and building relationships with clients that make a tangible, positive difference in their lives. He helps clients with all aspects of their financial lives, such as retirement planning, education planning, charitable giving, and investing.

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