With the stock market flashing more red than green these days and economists warning that recession risks are rising, some investors may be eyeing the exit sign.
But by leaving now, you risk missing out on the best days in the market, experts say.
“High volatility doesn’t just mean low volatility,” said Veronica Willis, investment strategy analyst at Wells Fargo Investment Institute. “During a downturn, the market is most volatile and will experience both high and low days.”
In other words: the days with the biggest gains and the days with the biggest losses are often so mixed up that you can’t get one without the other.
Rising days follow falling days
As a result, financial advisors recommend continuing to invest in difficult market times and even increasing your contributions, if you can afford it.
Past history shows that this pays off.
A $5,000 investment in the S&P 500 at the Great Recession low (March 9, 2009) would have been worth more than $36,000 by early July, according to Morningstar Direct analysis. The same investment at the low point of the pandemic slowdown (March 23, 2020) would have reached nearly $9,000 this month.
JP Morgan’s analysis came to a similar conclusion: someone who invested $10,000 in the S&P 500 on January 1, 2002 would have a balance of $61,685 if they stayed invested until December 31, 2021. missing the 10 best market days during this 20-year period, they would have $28,260.
“In a bear market, every dollar you can invest goes further, with more room for growth over time,” said Rob Williams, managing director of financial planning at the Schwab Center for Financial Research.
While investing during volatile markets can help you succeed, that doesn’t mean increasing your investment contributions should be your first financial priority.
Before directing more of your money to the market, make sure you have a adequate emergency savings account, Williams said.
Most experts say that means three to six months of your expenses are salty. If you don’t have enough cash on hand, you may have to sell your stocks when they’re at a discount if you lose your job or suffer some other sudden financial setback.
If you have high-interest debt, focus on paying it off before investing more in the market, said Bryan Stiger, financial planner at Betterment. Interest rates on your credit card may be higher than your potential market returns.
Once you’ve solidified those financial foundations, where you direct your additional investments is another important consideration, experts say.
Be sure to put as much as you can into tax-efficient retirement accounts, including any 401(k) plan or individual retirement accounts, Stiger said. Hitting the limits here usually comes with benefits that you won’t get with a regular brokerage account.
For example, your 401(k) contributions allow you to reduce your taxable income and sometimes come with a company match. Meanwhile, a Roth IRA uses after-tax dollars, but then allows your money to grow tax-free.
Beyond retirement, Stiger said, “Are there any other particular goals you want to save for? Like a house or college for your kids? Any excess funds you have can be invested for finance.”