Over the long haul money invested in the US stock market tends to provide better returns than other investment vehicles. When to start investing in stocks is early in your life. How good are stock investing returns? Thesimpledollar.com quotes Warren Buffett who says you can expect a 6–7% annual return from the stock market over the long term. Where does 7% come from?
Buffett describes the analysis that led him to that kind of conclusion: ”The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.”
There are single stocks like Microsoft in its growth phase that grow a hundred fold over a decade and there are years like the bull market from 1982 to 1999 when stocks gain closer to 15% a year. But predicting which stocks to buy and timing the market is not easy. If you want to aim for that 7% figure invest in a wide range of stocks or an exchange traded index fund that follows the S&P 500. Then the averages will apply to you. If you buy just a couple of stocks pick large cap stocks that have a long history of paying dividends and steady growth. If you want to beat the averages what do you do?
Big Picture Market Timing
There is a famous old saying credited to Baron Rothschild. The time to buy is when there’s blood in the streets. He made a fortune buying in the London stock market panic following the Battle of Waterloo in the 19 century. Market timing can be tricky but when big picture events drive all stocks down as in a stock market crash there are great stocks to buy everywhere. These are the US stock market crashes in the last 30 years.
- Black Monday, October 19, 1987
- Friday the 13th mini-crash, October 13, 1989
- Early 1990s recession, July 1990
- Dot com bubble, March 10, 2000
- Stock market downturn of 2002, October 9, 2002
- United States Bear Market of 2007–09, October 11, 2007
- Financial Crisis of 2007–08, September 16, 2008
- 2010 Flash Crash, May 6, 2010
- August 2011 stock markets fall, August 1, 2011
When a bull market comes to its later days there are typically late investors who will buy any stock based on the assumption that stocks always go up. When the market collapses these folks hold out until prices fall substantially and then sell in a fit of depression swearing off stocks forever. When to start investing in stocks, or at least when to pick up some good deals, is when there is the kind of blood in the streets scenario that a market collapse provides.
Dollar Cost Averaging
Buyandhold.com suggests that you set your goals and invest on autopilot.
Investing on a monthly basis instills discipline to an investment program. This is crucial since you need to invest during good times and bad. In fact, you cannot build a seven-figure investment portfolio without buying during crummy market periods. That’s when stocks are on sale. That’s when you get the best buys. That’s when your investment dollars offer the most leverage. If you fail to routinize your investment program by investing every month, you may not have the courage to invest during down markets.
Don’t wait to time the market and don’t wait until you have more money. Set aside a fixed amount that you will invest every month. This also lets you apply what is called dollar cost averaging. Because you are investing a fixed amount each month you will get more stocks for your money in down markets and not pay too much for stocks in a high market. When to starting investing in stocks in early and when to stop is never.