One of the questions that starting investors often face is: when do you step into the market? For months, you've been seeing the stock price of a company you’re interested in rise, but you don't dare to step in. What if it has already peaked? What if the share price collapses? If the price drops, you might ask yourself whether the bottom has already been reached. What if the price goes down even further? Timing the market is very tricky, especially in turbulent times. Nevertheless, there are ways to deal with it.
Of course, the ideal scenario is to buy shares or other investment products while they are at their lowest point. However, you can only ever know this by looking backwards. For all you know, the stock could go down even further. The idea of perfect timing is therefore better left as just that – an idea. It is more important to look at what you expect a share to do in the long term. Healthy companies that have been making profits for years and are dominant in the market do not disappear overnight.
When the stock market sharply drops, it usually affects all stocks. Even those of healthy companies. Due to negative stock market sentiment, these shares are often unfairly punished. This can be a great entry moment for you as an investor. You still do not know what exactly the lowest price will be, so investors often prefer to settle for a slightly higher purchase price over missing the boat entirely because they didn’t dare to enter.
The ideal time does exist but focusing entirely on that moment is often unwise. Nobody can time the market perfectly. If you keep waiting for a low price, in many cases, you miss out on profits. Let's look at an example using the S&P 500 index.
Suppose you wanted to start investing in the middle of 2020. Let's use 1 July 2020 as the exact date. You're looking for the perfect time to get into the market to invest some of your savings. You choose an S&P 500 ETF, a frequently chosen product by beginners. You decide to wait until the price of this ETF takes a deep dive. After two years of waiting, the moment has finally arrived! After an upward trend, the S&P 500 falls to a price reading of 3,666 points within a few months. Almost 22% loss from its high. Your ideal time!
But what if you had entered on 1 July 2020? On that day the S&P 500 was at 3,039 points. Even with the losses of the last few months, you would have gained over 20%. So, you see, the time frame over which you invest is often more important than perfectly plotting the right time to invest.
Investing can be stressful. Especially for beginning investors. Stock prices are never stable and are always moving up and down. To reduce the risk of loss and avoid stress, you can spread your investments and buy products you are confident in for the long term.
Putting in a small amount every month is obviously less stressful than investing a big chunk of money in the stock market all at once. When investing small amounts at different times, you don't have to worry as much about timing the market. For example, you can choose to invest some money on a fixed day every month. We call this method dollar-cost averaging. Step by step, you build up a nice investment amount. Because you do this gradually, you are less dependent on the vagaries of the market. One time you buy when the price is high, the next time when the price is lower. In the end, an average purchase amount remains and you are therefore not dependent on timing the market.
Only buy product you have confidence in. Then, if things get tough, you can think back to why you chose that product. For instance, invest in a company you know well, such as the supermarket where you do your shopping, the streaming service you always watch or the company where you often buy your shoes. Always research carefully what you are investing your money in. By doing so, you are investing wisely and not gambling.
Runners are deadbeats they often say. The same applies to investing. Making money fast is possible, but losing it all again even faster is also one of the possibilities with risky investment products. Therefore, it’s wise to invest for the long term. In addition, you can reduce your risk by diversifying with different shares from different sectors or choosing investment products such as ETFs with which you get into several companies at once.
Let’s take the S&P 500 index as a long-term indicator again. Over the past 30 years, this index has risen by more than 10% per year on average. And this is despite all the major crises and stock market crashes that have occurred during this period. If you invest in a product like an S&P 500 ETF today, history shows that there is a good chance of a positive result over the long term.
Note that past results are no guarantee for the future.
At DEGIRO, we have a lot of products you can start with as a beginning investor. When to step into the market? That's up to you. But remember that waiting too long can cause you to lose out on potential profit. Buy stocks or ETFs you feel confident in, and then let time do its work.Open an account
The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.
Investing involves risks. You can lose (a part of) your invested funds. We advise you to only invest in financial products which match your knowledge and experience. This is not investment advice.
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