When you’re thinking about investing in the stock market, it’s normal to be a little nervous. That’s particularly true during periods of economic uncertainty, which is what people are facing today. When prices are fluctuating, or a downturn is either occurring or on the horizon, it’s common to ask questions like, “Should I invest in the stock market now?” and “Should you buy stocks when they are down?” If you’re wondering whether investing today is a smart move, here’s what you need to know.
The Current State of the Stock Market
During late 2022, the stock market was generally trending downward. Issues like inflation and a potential recession can make investors wary, leading to some significant drops in stock market values.
In early 2023, there was some additional volatility following the collapse of two banks in the United States, with many fearing that those failures would have a cascading effect. However, that didn’t happen, and investors are feeling a bit more confident now.
Additionally, while inflation is still a concern, prices aren’t rising as quickly as they did during parts of 2022. While there may be another interest rate increase on the horizon, the positive impact the others had on inflation could mean that additional hikes won’t be necessary, or they’ll be incredibly modest.
Overall, the stock market in 2023 has largely been marked by a rebound when compared to the declines in 2022. Along with some returning investor confidence, some experts believe that any potential recession will come with a soft landing, particularly since the labor market remains strong.
As a result, while there’s still uncertainty when it comes to the stock market, the situation isn’t nearly as frightening as some previously expected. While that doesn’t mean there will be significant gains in the coming months, it could mean that losses would be minimized and recovery could occur in relatively short order. However, the stock market is – and will always be – a bit unpredictable, and it’s critical to keep that in mind.
Should You Buy Stocks When They Are Down?
Generally, buying stocks when the market is down isn’t a bad idea for long-term investors. It creates opportunities to acquire shares at more affordable prices. Then, when the market recovers and growth returns – which is what traditionally happens given enough time – those investors can enjoy the gains. Essentially, even if there are losses initially, those with a longer timeline can essentially ride out the storm.
For short-term investors, buying stocks when they are down is also potentially wise, but it can also lead to losses depending on how the market shifts in the coming months. It’s still unclear whether more losses could occur, particularly if the United States officially enters a recession or interest rates rise again to combat inflation. Ultimately, shorter timelines increase risk since a sudden downturn is more likely to result in losses that aren’t recoverable before an investor plans to withdraw that money.
However, in either case, investors need to do their research before investing in anything. Market volatility isn’t something short-term or long-term investors should ignore. Often, it’s best to look at a company’s ability to operate successfully even if economic conditions move in an unfavorable direction. That helps you determine if a stock is potentially undervalued, as those can be solid opportunities.
Just make sure to balance any investments with your risk tolerance. Additionally, don’t overlook the importance of diversifying. A diversified portfolio is typically more resilient, as losses in one area may be offset by gains in another. When in doubt, look for index funds or ETFs that offer inherent diversification, as those generally come with less risk.
Do you think that now is a good time to invest in the stock market, or do you believe that economic conditions aren’t ideal for investing? Do you traditionally try to take advantage of falling stock prices, or does your investing not change when the market fluctuates? Share your thoughts in the comments below.
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.