Key Points
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Market indexes have been reaching new heights, and right now is an incredibly expensive time to buy.
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Some investors are worried a correction or recession may be looming, making it smarter to wait.
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However, history suggests that there’s never necessarily a bad time to invest.
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10 stocks we like better than S&P 500 Index ›
The S&P 500 (SNPINDEX: ^GSPC) has been breaking records over the last few weeks, officially reaching a new all-time high in July. As of this writing on Aug. 1, it’s up by about 25% from its low point in April.
However, not everyone is optimistic about the market right now. In fact, one-third of U.S. investors say they are feeling “bearish” about where stocks will be in the next six months, according to the most recent weekly survey from the American Association of Individual Investors.
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With stock prices near record-breaking highs, some investors may be tempted to wait until the next downturn to buy at a discount. Here’s what history says about whether you should buy now or hold off.
Image source: Getty Images.
Is it safe to invest now?
Nobody can predict where stocks will be a few months or a year from now, and new policies out of Washington could change things on a dime. However, several scenarios are possible.
For one, stock prices could continue soaring like they have over the past few months. If that happens, right now would be a fantastic time to buy to see immediate gains.
Scenario two is that the market takes a sharp turn for the worse, like it did earlier this year amid tariff uncertainty. Between February and April, the S&P 500 fell by close to 20%, leaving many investors panicked and eager to sell. But those who stayed the course and held their investments reaped the rewards when the market quickly rebounded.
A similar situation played out in March 2020, when the S&P 500 experienced one of the fastest crashes in history at the start of the pandemic. The short term was rough, but the S&P 500 has since earned total returns of nearly 112%.
^SPX data by YCharts.
The third scenario may be the one that concerns investors the most: a prolonged recession. But even if that is on the horizon, investing at record-high prices doesn’t necessarily mean you’ll lose money.
A market downturn may result in your portfolio losing value. But if you hold your investments until the rebound without selling, you likely won’t experience any actual losses.
Say, for example, you invested in an S&P 500 index fund in December 2007. The market was reaching record highs at the time, but it was about to slip into the Great Recession, which would last until 2009.
^SPX data by YCharts.
In that time, your investment would have plunged by more than 50%. Selling at any point during that recession could have locked in significant losses, since you would have likely been selling your investments for far less than what you paid for them.
However, if you simply stayed in the market, you would have earned total returns of around 75% after 10 years and 312% by today — more than quadrupling your money.
^SPX data by YCharts.
In other words, even if you had invested at the seemingly worst possible moment — at record-high prices immediately before one of the most severe recessions in U.S. history — you would still have made a significant amount of money over time.
Now, could you have earned more if you had waited until the market was at its lowest point to buy? Definitely. But hindsight is 20/20, and nobody knows when the next correction or bear market will begin. Timing the market accurately is next to impossible, and if your timing is even slightly off, you could potentially lose a lot of money.
Rather than waiting for a chance to “buy the dip,” it’s often wiser to invest consistently. You can always increase the amount you invest during the next slump, when stocks are at a discount. But in the meantime, continuing to buy can ensure you’re not missing out on immediate gains if stock prices stay on the rise.
One major caveat to remember
The key to ensuring your portfolio survives a downturn is to only invest in long-term quality stocks. Sometimes weak companies can thrive in the short term, earning exponential growth in a matter of months. But those investments are far less likely to pull through tough economic times.
Healthy companies with strong business foundations have a much better chance of seeing long-term growth despite short-term hiccups. When a company has a solid competitive advantage, a competent leadership team, robust financials, and a long-term plan for the future, it’s much more likely to survive even the worst recessions or bear markets.
The most important thing you can do right now, then, is double-check that every stock in your portfolio deserves to be there. Once you’re certain that all of your investments have healthy fundamentals, you can rest easier knowing that you’re well prepared for whatever may lie ahead.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
