The year just ended demonstrates how different investors can react to the same market conditions. Starting in early 2021 and well into the summer months, stock markets surged overall. Some people wondered if they should boost their investment amounts to capitalize on the booming markets. But others worried about buying into the market at all when prices are high.
Investors can also react in opposite ways when markets are in the midst of a severe or prolonged downturn. Some people want to increase their investment amounts, buying in the dip, to profit when markets recover. Others wonder about halting their contributions or even selling some investments.
A tried-and-true method
Most long-term investors are best off by sticking to a schedule of investing regularly, regardless of market conditions. This practice ensures that you won’t overinvest when prices are higher, and you’ll take advantage of buying opportunities when prices are lower.
You also benefit in several other ways. Psychologically, you won’t worry about how you’re supposed to react to the market cycle and volatility. You avoid the temptation of trying to time the market – guessing the right time to buy or sell. Also, it matches up nicely with your paycheques or other regular income.
Theory versus reality
In theory, investing when prices are low offers more chance to profit the most. But the reality is that attempting to buy low presents a couple challenges. When prices fall, you never know if you should wait another day, week, month or longer. In a bear market, you could get caught waiting on the sidelines – and it’s time in the market that matters in the long run. That’s why investing the same amount regularly works in practice. You do buy low, and you benefit from time in the market.