Should You Really Be Investing in the Stock Market Right Now?

It’s been a bumpy ride in the stock market lately, and it has a lot of investors worried that their savings are about to take a beating. That’s a scary thought, especially if we’re talking about years of hard work that have gone into your retirement account. It would be silly to ignore some of the warning signs, but now’s not the time to give up on the stock market. The evidence overwhelmingly suggests that a steady approach will result in the best long-term investment performance.

Fear is a bad reason to avoid the stock market

Withdrawing from the market right now would be a fear-driven act, and you should strive to remove emotion from your investment decisions. Fear and greed cloud your judgement. Instead, we can use actual data to make decisions.

It’s completely sensible to have concerns about the market right now. Major indexes are just below all-time highs, and the strong returns over the past 18 months have made stocks expensive relative to earnings, cash flow, and dividends. Interest rates look set to rise within the next year, and we still haven’t fully recovered from the economic impacts of COVID-19. There’s a good argument that a correction is likely coming.

Image source: Getty Images.

Unfortunately, investors need to have a more sophisticated approach to risk management. Opportunity cost, for example, can be just as destructive as a market crash. What if the next crash is still 12 months away, and major indexes climb another 15% before the hammer falls? Even if your analysis correctly indicates there’s more downside risk than upside potential at the current valuation levels, there’s still a plausible scenario where staying invested pays off.

Every good investment strategy assumes that market cycles are inevitable and that stock portfolios are volatile. You shouldn’t abandon your strategy just because the likelihood of volatility is higher than normal.

A crash probably won’t justify selling out

Timing markets is insanely difficult. In fact, it’s so challenging that the majority of asset managers fail to consistently outperform the market, even during volatile periods when they’re supposed to shine. It’s too simplistic to boil this down to active vs. passive investing, but it’s important to establish the likelihood of bad outcomes for investors who are lured into short-term stock picking. There’s simply too much that we don’t know and cannot predict, and timing requires a level of precision that nobody’s really been able to achieve. A small number of days provide a huge proportion of total growth. Missing them can completely derail your long-term performance.

Even if we are striding toward a crippling market crash, it’s only going to be a temporary setback. Stock valuations ultimately reflect the cash profits that a business is capable of producing. That leaves a lot of room for interpretation and guesswork if we’re talking about a high-growth company that could be either defunct or 100…