If you’re feeling jittery about investing right now, you’re not alone.
The stock market is on track for one of its worst years in modern history: The S&P 500 (^GSPC 0.48%) index of top large-cap stocks is down 18% from its peak at the beginning of the year. A combination of fears of a recession, inflation at 40-year-highs, and rising interest rates have turned the pandemic rally upside down.
If you’re wondering whether it’s safe to invest in the S&P 500 right now, the answer is that it depends. First, let’s take a step back and ask a few questions to see what kind of investor you are.
What’s your time horizon?
Investing in stocks is risky. There’s no guaranteed return, and bear markets can last for years. However, investing for the long term — five years or more — is one way to smooth out those risks.
Having a short time horizon, in other words, makes investing in the S&P 500 riskier. If you’re planning to invest money you’ll want to use in another year or two, putting it into the S&P 500 leaves you at risk of losses. The stock market could slide further into a recession, and interest rates could continue to climb, squeezing consumers and businesses and making bonds more attractive by comparison. But there’s also the possibility that stocks could soar over the next year if inflation cools off and the Federal Reserve pumps the brakes on rate hikes.
On the other hand, if you’re planning to invest for five years or more, you have a much greater chance of making money in the S&P 500, as you’ll smooth out the current volatility and risk of a recession. Historically, the S&P 500 has returned about 9% annually with dividends reinvested. While you’re not guaranteed a 9% return, investing with a longer time horizon makes it more likely that your returns will resemble the historical mean.
Do you think you can time the market?
Spoiler alert: You probably can’t. Vanguard founder Jack Bogle said of market timing, “I don’t know anybody who has done it successfully and…
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