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- On March 9, the Dow dropped by more than 2,000 points and the S&P 500 dropped by more than 7% as fears over the coronavirus spread worldwide. I chose that day to invest another $10,000.
- Despite these dramatic losses, most financial advisers seem to agree that now is as good a time as any to invest. However, you do need to invest with a plan.
- When you use dollar-cost averaging, you invest the same amount of money each month no matter what. Research shows that timing the stock market rarely works, yet a long-term buy-and-hold strategy does.
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As of the end of the day on Monday, March 9, the Dow Jones industrial average had dropped more than 2,000 points and the S&P 500 dropped by more than 7%. Fortunately, I didn't panic or freak out at all. Instead, I logged into my Vanguard brokerage account and invested $10,000 primarily in index funds. After that, I shrugged and carried on as usual.
I always try not to pay attention to the stock market, and most of the time I succeed. Still, it's hard to look away when the day's top news stories are about the stock market tanking, the potentially devastating impacts of the coronavirus, and how these two tragedies are inexplicably intertwined.
Despite all the dramatic headlines, though, Monday was just another day in my quest toward a wealthy retirement.
Why I invested $10,000 in the stock market during a selloff
Why invest in the stock market when it seems like everyone else is panicking? As a 40-year-old woman who doesn't plan to retire for another 15 years, the answer is a simple one for me: time is on my side.
Here's why I carried on as normal during a stock market panic, and why I'll continue my strategy for the long haul.
We invest using dollar-cost averaging
While I definitely invested this month on a down market day, I have also invested on days when the stock market has achieved a record high. I try not to even look, but sometimes I can't help myself!
My husband and I normally invest the same amount every month, and usually within the first 10 days of the month right after we get paid. And yes, that's on top of the money we automatically transfer to our Solo 401(k) accounts with Vanguard around the third of the month.
With dollar-cost averaging, you don't have to worry whether the price of your chosen investment is up or down. You simply invest the same amount every month at the same time of the month, then let market movements smooth out your purchase price over time. You might invest when prices are up on some days, but you're bound to invest when prices are down if you keep investing the same amount over the long term.
We like investing this way because it takes the emotion out of investing, it makes our process easy, and we know that it works.
I have a long timeline until retirement
If I were planning to retire within the next few years, I would find it very discouraging to see my retirement and brokerage account balances drop overnight. But since I have more than a decade to retirement and potentially longer than that, I'm not worried at all.
While the coronavirus seems like it's going to ruin everything right now, plenty of tragedies have affected the stock market and economy for short bursts over the years. We all know the stock market crashed after the September 11, 2001 terrorist attacks, and the financial crisis of 2007-2008 led to one of the Dow Jones' most vicious one-day losses in history on September 29, 2008.
Those days seemed like the end of the world, yet stocks have only increased in value over time. Plus, it's important to keep things in perspective. According to Vanguard, we lived through 11 market corrections and eight bear markets from 1980 to 2017. That means that, on average, there's been an "attention-grabbing downturn every two years."
Timing the market rarely works
The advice to "buy low and sell high" is good in theory, but it rarely works in practice. In fact, numerous studies have shown over the years that even disciplined and informed investors, including active fund managers, don't normally beat the market even though their job is to try.
I would much rather spend my time and energy working to earn more money and enjoying the money I have. With that in mind, I keep investing around the same amount every month, and it's nice to not have to worry whether my timing is good or bad.
What do financial advisers have to say about investing when the stock market is down?
Is it a good idea to invest right now? I reached out to several financial advisers to find out their thoughts, and the general consensus was that now is as good a time to invest as any.
According to financial adviser Kevin Matthews of Building Bread, it depends on the type of investor you are. If you plan on keeping your investment for five years or longer, Matthews says you could make a case for jumping in while things are low and riding it out.
Investors should think of it this way, he says: "When the price of a flight drops, you don't panic and wait for the price to get more expensive. You buy it now because you know the real value of the trip and you know in time prices will rise."
Matthews also says that investors who stick to regular monthly or quarterly investments will likely fare the best when it is all said and done. "Say you have $10,000 to invest," he says. "I would recommend investing $833 into an index fund or your favorite stocks each month. This will put you in the best position when the market recovers."
Financial adviser Tony Liddle of Prosper Wealth Management says that if you're worried about the stock market going lower, then it might be smart to assume it will and only invest a portion of your money. From there, make a deal with yourself to invest more in one month regardless of price.
"If you do this, there are only three options," he says. "You were wrong and the markets went up and you made money, nothing happened and [you] made no money, or you get to buy in at a lower price."
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