If you looked at US stock markets today you’d think the global economy is doing just fine. Both the S&P 500 Index and tech-centric Nasdaq Index are near all-time highs.
In 2020, a year when Covid-19 ravaged the global economy, the key US indices rose 16.4% and 48% respectively.
That doesn’t seem to add up given Covid-19 has hit businesses everywhere, from the US to Europe to China. Given the market’s gains, it would be natural to think twice about whether to invest at these levels.
Does that mean we, as investors, should stop buying into great companies and refrain from putting our money into stocks for the long term? I believe the answer is a resounding “no”. Here’s why.
Don’t bother timing the market
It’s a well-known mantra that is constantly drilled into investors – “don’t try to time the market” – but how many of us actually heed it when we buy stocks?
In that sense, taking the emotions out of investing is ideal, which is why I’m such a big believer in regularly investing, or dollar-cost averaging, into the market. That holds true, as long as you have faith in the companies you’re investing in.
Buying for the long haul
That brings me nicely to the next point, which is to (obviously) buy great companies that are riding multi-year trends.
However, what’s less obvious is that it really doesn’t matter when you buy or invest in a great company as long as your time horizon is long term – think at least five years if not longer.
Just look at Amazon.com Inc (NASDAQ: AMZN). In July 2013, you could have bought shares at an all-time high of just over US$300. Taking that plunge to buy a company that trades at an all-time high is a psychological barrier.
However, if you had done so, you’d be sitting on a 10-bagger today as Amazon’s share price now is over US$3,100.
Of course, you could also have bought just before a 30% plunge in Amazon’s share price in a market sell-off at the end of 2018.
The e-commerce and cloud computing giant’s stock lost nearly a third of its value in the space of three months.
Yet, as with all market corrections, the best companies always bounce back stronger and even if you had purchased Amazon stock then, you’d still be up over 50% today – around two and a half years later.
Time in the market matters most
The point I’m trying to make is that it’s always the right time to buy stocks. That’s particularly true for stocks that you truly believe have long-term potential.
Timing the market is impossible – it’s such a cliché but it is exactly that because it’s true. No one can time the market perfectly and anyone who claims they can shouldn’t be believed.
What matters most is ensuring you stay invested in the stock market through the ups and downs, while holding on to great companies that can keep growing your wealth over the long term.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.