It is a very uncertain time to be an investor, with Wednesday recording the biggest one-day decline in the S&P 500 since June 2020. As Warren Buffet would say there is “blood in the streets”, but is now a good time to buy? Or will we continue to see bleeding in the months ahead? The causes for the market crash are variables including: low earnings reports from top companies, inflation, rising interest rates, and the uncertainty of the global market due to the Russia and Ukraine conflict.
With the United States economy being on the brink of a recession it is important to evaluate your investment strategy. If you’re a long-term investor, then this pullback is something that comes along with the ride. But if you’ve recently entered the stock market this could be a very scary experience that might cause you to panic sell. History tells us that when it comes to investing, an investor must develop a “zoom out” strategy. And not to focus on the day to day price action. This is because the S&P 500 has come back from every one of its prior bear markets to eventually rise to another all-time high.
A way to avoid all of the market fear is by dollar cost averaging– by putting in a little bit of money on a consistent schedule (i.e weekly, monthly, quarterly etc.) you take the emotion out of investing. When a stock price is at a low point you buy more shares, and when the stock price is at all time high you buy fewer shares. The benefit to this strategy is having a lower average price per share over time. A 2012 study by Vanguard found that historically investing your money in a lump sum vs. dollar-cost averaging produced better results 66 percent of the time. The longer the time frame, the greater the chance that investing all at once beat dollar-cost averaging. It would be ideal to know when a bottom was in and to invest a lump sum. But that strategy is not practical, and noboby is right 100% of the time. The winning strategy is dollar cost averaging.
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