Become a better investor
Lesson in Course: Market movements (beginner, 4min )
We're afraid to lose my money. Should we wait until there's a perfect time to buy?
Investing right before a crash is a fear that all investors have. No one wants to be stuck without a chair when the music stops. While it could happen, no one can predict the future or know precisely when the next crash will happen, so this fear shouldn't stop us from investing.
"Markets are going to crash! Sell now." "Bitcoin will be $66,000 in a month; buy now!" "The investor who bought Amazon stock at $20 says you should buy these 3 stocks!"
We need to be wary of headlines like these. The dynamics of supply and demand combined with people's perceptions of value largely determine market prices, making them impossible to predict.
Hedge funds and professional investors on Wall Street all know this. It's why they hire the brightest statisticians to help them consider all likely outcomes rather than predicting one. The following clip from Wolf of Wallstreet describes this well.
However, that hasn't stopped certain people from trying or professing that they can. After all, it's by far easier to convince unsuspecting folks to buy shares based on speculation that the value will continue to go up (a pump and dump scheme) rather than predicting the market.
Likewise, we can always tell people to buy an umbrella today whether we believe it's going to rain or not. If it rains later, we'll look like a genius. And if it doesn't, then we will just tell them again tomorrow. Eventually, we are bound to be correct.
For those starting to invest for the first time, putting money in the market right before COVID-19 would have been stressful.
It's important to remember that no one, even professional investors, can time the market correctly. It can be more costly to wait for the "perfect time" to start investing because we'll miss compounding returns while we wait. Instead, things begin to appear brighter if we take a look at long-term results.
An effective strategy to help us reduce the risk of just plain bad luck or poor timing would be to space out our investments. Let's say we had $500 to start investing at the beginning of 2020; losing nearly $160 right away would have been discouraging and tough to recover. If we split the $500 into 5 increments of $100, we would have only lost $30 when the pandemic set in. Furthermore, we would have been able to buy at the lows with the remaining $400. This is called dollar-cost-averaging (DCA). Read more from our lesson about DCA.
The scariest thing for most emerging investors is taking the first steps in doing so. Perhaps it's because of what we are taught in school or it's just ingrained in our nature but almost everyone deep down is a perfectionist. Investing at the wrong time or losing a little bit of money can feel like a kick-in-the-gut at first. It feels just like the first time a brand new car gets scratched up. However, if we look further down the road, these small blips hardly matter in the long run.