Why you should not invest in the stock market now?
You need the money in the near future
If you know that you need the money in the next 1-2 years, maybe it’s for a down payment for your house, or to pay for your wedding or your house renovation, then you should not invest that money.
You can instead consider putting this money in a high interest savings account (not that there are many amid this low interest rate environment) or in a short term Fixed Deposit.
You don’t have an emergency fund
With unemployment rate growing, you must be prepared for when you are suddenly being retrenched. If you don’t have an emergency fund to draw on when that happens, you will have to sell of any investment you have made even when the market is down, and this could result in unintended losses.
You have high interest debt
Compounding interest works both ways. In investment and in debt. You should pay off any high interest debt sooner than later. The longer you take to pay it off, the more in interest charges you will have to pay.
Why you should invest in the stock market now?
When is the best time to plant a tree? 10 years ago. When is the next best time? Now.
This is exactly the same for investing in stock market. If you didn’t invest 10 years ago, now is the best time to start.
Historically, stock markets always appreciate over the long run.
One year ago, S&P 500 was at all time high at around 3240. Today, S&P 500 is at 3700. Even if you have invested at all time high last year, you would still have made 14% gain today.
You have a long term investment horizon
It is not uncommon for the stock market to drop 10-20% over a short period. Just look at what happened in March 2020 when S&P 500 fell by 34% to hit all time low. Having a longer term horizon allows you to ride out any temporary market down swings.
Time in market is better than timing the market
Buy low, Sell high. That sounds easy enough.
When the stock market crashes, it seems like a really good time to buy. But how many of you actually dare to buy at that time? Most of the time, we would be thinking, what happens if it goes lower? Emotions play a big part in timing the market. You might end up missing opportunities because of that.
That said, there are 2 things to keep in mind before you start.
Your risk tolerance and asset allocation
Depending on your risk tolerance, you should make sure your asset allocation reflects the risk you are willing to take.
A simple way to to determine your asset allocation is to take 100 – your age.
E.g. I am 40 years old, so this would mean 100 – 40 = 60.
So 60% of my portfolio should be in stocks and 40% in bonds. Again, this is just a simple guideline. If you are more aggressive and can tolerate more risk, you can always tilt the stocks allocation up and vice versa.
Individual Stocks vs Index ETFs
There is never a bad time to buy into good companies. However, not all of us are good at identifying good companies. You should only pick stocks if you know how to. If not, you are better off buying an passive index ETF.
An index ETF follows a benchmark index. E.g. VOO (Vanguard S&P 500 ETF) tracks the S&P 500. Companies get rotated in and out of an index. So if you are holding it for long term, you won’t have to worry about the index going bust.
However with individual stocks, you will need to constantly keep track on the stocks. Remember Blackberry Ltd? At it’s peak, it was around USD$144, and now, it is only worth USD$7.
Or Barnes and Noble stock that no longer existed today. That is the problem with buying individual stocks. You can’t just leave it and not track it.
You shouldn’t invest in the stock market now if
- You need the money in the near future
- You don’t have an emergency fund
- You have high interest debt
You should invest the stock market now because
- Historically, stock markets always appreciate over the long run
- You have a long term investment horizon
- Time in market is better than timing the market
as long as you
- make sure your asset allocation matches your risk tolerance
- you are picking individual stock because you know to, otherwise stick to a passive index ETF
Alternatively, you can automate your investments, so that you buy into the stock market every month. This way, it takes the emotion out of investing, and you won’t have to decide if you should invest or wait.
If you reside in Singapore, these are some of the platform that I’ve personally use to automate my investments.