There are always reasons to put off investing. Maybe you're worried about another stock market crash or you think stocks are overpriced. Or perhaps you're waiting until you're on better financial footing to get started.
While investing sooner almost always wins out over putting it off, there are a few exceptions. Here are three good reasons to wait to invest, and three good reasons to stop delaying.
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Three reasons not to invest right now
There are two big reasons to hold off on investing. The first is if you have debt that's costing you more in interest than you could expect to earn. Aim to pay it off before you invest. The other is when you think there's a good possibility you'll need to cash out to meet your short-term needs. Here are three specific situations when holding off makes more sense.
1. You have credit card debt
Cardholders who carry a balance pay an average APR of 16.61%. That's double the inflation-adjusted returns of about 8% that the S&P 500 index averages in a given year. Simply put, investing $1,000 could earn you about $80 in an average year. But putting that $1,000 toward credit card debt would save you $166.
2. Your emergency fund is lacking
The coronavirus crisis is a good reminder of just how important it is to build an emergency fund that can cover your essentials for three to six months. Tens of millions of people suddenly became unemployed at the same moment stocks were tanking. Successful investors keep sufficient cash reserves so they can ride out short-term volatility. If you tap your investments while they're down to survive a crisis, you'll seriously impede your long-term performance.
3. You need the money for a short-term goal
Money that you're saving for a down payment or business start-up costs doesn't belong in the stock market for the same reason your emergency fund doesn't belong there. Your money needs time to recover if stocks drop.
Three reasons to invest right now
If you don't have high-interest debt and you have enough cash saved for short-term needs and goals, investing as early as possible is clearly the best strategy. That applies even if you don't have much money to start with.
1. Compounding is an investor's best friend
Suppose your goal is to have $1 million by age 65. If you averaged 8% annual returns, you'd need to invest about $670 a month if you started at age 35. But if you started investing at age 25, you could get there with just $286 a month.
You'd only need to invest $137,280 over 40 years to get to millionaire status, thanks to the power of compounding. But had you waited until 35? Because your money has less time to compound, you'd need to invest $241,200 over 30 years.
2. Long-term investors don't need to worry about short-term performance
Compounding isn't the only reason long-term investors succeed. A stock market correction -- defined as a 10% or more drop in the S&P 500 index -- happens every 1.84 years on average. Major crashes of 30% or more, like the one triggered in 2008 by the financial crisis or the March COVID-19 crash, occur once a decade.
Historically, the stock market has always recovered. That means you really shouldn't worry that the market will tank once you've invested in it. If you have a diversified portfolio and you're a long-term investor, you can count on your portfolio's eventual recovery.
Investing in the S&P 500 produced positive returns 73% of the time in any given year between January 1999 and December 2018. But over a 10-year holding period, your odds of making money jumped to 94%.
3. Your money's barely earning anything in a bank account
The days when you could plop your money in a bank account or CD and earn 2% or 3% are gone. The Fed plans to keep interest rates near zero through at least 2023, so don't expect much interest from those investments any time soon.
If you're not investing, your money is losing purchasing power because what it's earning in the bank is probably too little to keep up with inflation. There's a big risk in not taking any risk. You sacrifice some short-term security by investing, but investing as early as possible is the only realistic way most people will achieve the gains necessary to build a nest egg.
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October 20, 2020 at 08:37PM
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3 Reasons to Invest Now -- and 3 Reasons to Wait - Motley Fool
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