Why do Americans make the mistake of keeping liquidity out of the volatile stock market

Why do Americans make the mistake of keeping liquidity out of the volatile stock market

If your favorite store offers 13% off merchandise, you should probably fill up your cart. But if you’re like many Americans, you may find that you’re not quite as enthusiastic about the markdown when it comes to buying stocks.

The S&P 500 – the common proxy for the broad US stock market – fell 13% in 2022, but people aren’t buying more shares at cheaper rates. Only 1 in 4 Americans say it’s a good time to invest in the stock market, according to a recent survey by Allianz Life, and 65% say they keep more money than they should out of the market for fear of investment losses.

These concerns aren’t completely unfounded: any investment has the potential to go down, and investment losses can be painful—especially for people who plan to live on their investment income in the short term.

If you’ve been investing for a goal that’s years away from you, letting fear keep your money out of the market, says Kelly Lavin, vice president of consumer insights at Allianz Life.

“When the market is doing well, people throw their money into it. And when the market is performing badly, they keep their money out,” he says. “It does the exact opposite of what it’s supposed to do.”

Here’s why investment experts say it’s unwise to keep your money out of the market right now, even though things look scary.

Young investors: time is on your side

Perhaps you are keeping money on the sidelines because you are waiting for the market to calm down. But unless you’re about to retire, you’re sacrificing your most important asset as an investor: time.

“The younger you are, the more often you need to be in the market,” Lavigne says. This is because the further away you are from your investment goal, the more time your portfolio will need to recover from dips in the market. Given the long-term historical upward trajectory of the market, starting early and continuing to invest means taking full advantage of compound returns.

Suppose a 22-year-old planning retirement at 67 initially invests $1,000 in the stock market, followed by $100 per month. If her portfolio generated a 7% annual return, she would retire with roughly $405,000, according to a CNBC Make It composite account. If it starts after only five years and other terms remain the same, its total drops to $280,000.

Market Timing: “You’ll Miss the Rise”

“But wait,” you might think. “I’m not going to wait five years to get my money back in the game. I’m just waiting for the market to hit the bottom so I can ride again.”

And herein lies the problem: in order to achieve long-term gains, you must invest in the best days of the market. And these often come right after the worst.

Over the 20-year period ending December 31, 2021, the S&P 500 has returned at an annualized rate of 9.52%. Remove the top 10 days from that period, and the yield drops to 5.33%, according to a JP Morgan analysis. During that period, seven of the best market days occurred two weeks after the 10 worst days.

“We have no idea where the bottom of this pullback will be, but we know with almost certainty that if you keep money out of the market, you will miss out on the slight increase,” Lavigne says. “The worst thing you can do is not be in the market when it starts to shift.”

Invest consistently through bear markets

Nobody enjoys seeing big red numbers on their wallet page. But if you’re investing long-term with a widely diversified portfolio, that’s not necessarily a bad thing, says Jeremy Finger, certified financial planner and founder of River Bend Wealth Management in Myrtle Beach, South Carolina.

“You have to want the market to be down, low, and low so you can buy low and low,” he says. “Then, if you can snap your fingers like a genie, you want the market to go up before you retire.”

Nobody is able to magically control the stock market, but as an investor you can control how you handle its volatility. One way to avoid getting caught up in what the market is doing is to invest a set dollar amount at consistent intervals. This strategy, known as dollar cost averaging, actually ensures that you buy more shares when they are cheaper and less when they are more expensive – effectively, buying low and selling high.

Right now, the market is leaning more on the “buy low” side of things, notes Aaron Clark, CFP and founder of Gig Wealthy. “You get a great entry point for the next 30 years of investing,” he says. “And if it drops a little more than that, that’s okay. That would be a better time to get your money back.”

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