A question I often get from people beginning their working careers is whether they should wait for the market to cool off a bit before they get started investing. For the new investor, my response is always the same – ignore whatever the market is doing and just get started now.
Of course, I totally get the concern. Since the great recession, other than the occasional bump in the road, we’ve pretty much been on a never-ending upward climb. Assuming we’re due for a correction at some point, it seems like it’d make logical sense to just wait a little bit and buy once the market gets cheaper. Why buy in at a more expensive point in time when the coming correction could be just around the corner?
The problem with this line of thinking is that it makes a few assumptions. First, obviously, it assumes that the market will drop at some point fairly soon. While we know the market WILL drop one day – that’s pretty much a given – we have no idea when that’ll happen. It might be tomorrow. It might be years from now. I don’t care what anyone tells you – NO ONE actually knows what things will look like in the future.
But second, and more importantly, the sit and wait crowd assumes that for the beginning investor, it matters when they begin their investing careers. Someone that started investing in 2006 or 2007, instead of in 2008 and 2009, went through some bumpy years, I’ll grant them that. But if they kept at it, they’re doing just fine today. Obviously, it would have been better in hindsight for them to have gotten in at the bottom of the market. But even with hindsight, 10 years later, does it really matter whether you began your investing career at the bottom or the top of the market?
I’d say it doesn’t. That’s because, as a new investor, you’ve got two things going for you that make it so that whatever the market is doing right now doesn’t really matter to you: (1) time and (2) you don’t have a ton of money invested.
The Downside Of Waiting To Invest
Before talking about any potential crash and why it doesn’t matter for the new investor, let’s instead start with the positive and assume that the market doesn’t see any significant drop for the next few years.
It’s easy enough to see this scenario in action. Since I started my working career back in 2013, I’ve heard time and time again from financial pundits that the market was due for a correction. Had I been this investor sitting around waiting to time the market, I’d still be sitting around trying to figure out what to do with my savings.
I sometimes wonder about the folks that chose the sit and wait approach years ago. If you do some Google searches, you’ll find folks on forums back in 2013 asking about whether they should wait to invest in the market. Four years later, and you have to wonder, what did those sit and wait folks do? Are they still sitting on the sidelines waiting or did they eventually just give up and buy in?
My point is this, if you wait to invest, you might never get a chance to invest at the prices you see in front of you. Even if you wait for a downturn, there’s no guarantee that the downturn will lead to prices below what you see now.
In any event, even if the crash comes tomorrow, you’ve got something really good going for you that is unique to the new investor – you’ve got no money…yet.
You Don’t Have Enough Invested For It To Matter
A recent grad beginning their investing career simply doesn’t have enough money for it to even matter whether they’re starting their investing career at the top or bottom of the market.
Let’s take an example. Imagine you’re an amazing, baller investor that chooses to max out your basic retirement accounts as soon as you get your first job. In 2017, you go ahead and throw down $18k into your 401k, $5,500 into a Roth IRA, and even max out an HSA with $3,400. Since you’re a savvy investor, you opt for low-cost index funds. By the end of 2017, you’ve thrown down $26,900 to start out your investing career. Not too shabby at all.
The next year, the inevitable crash that we’ve all been waiting for happens. Let’s assume it’s a horrible crash and the S&P 500 drops 50%. As a result, your $26,900 of investments just lost half its value – down to $13,450.
Yeah, seeing your investments lose half its value isn’t fun. But early on in your investing career, who cares?
In the grand scheme of things, $10k, $25k, $50k, or even $100k isn’t very much of a loss. It’s peanuts compared to the large portfolio that you’re trying to create. And since you’re just starting out your career, you’re potentially decades away from needing that money. Who cares what the market does when you don’t even need it now.
But the second thing that I think really makes this not matter at all is this:
It’s Easy To Balance Out Your Losses
So imagine the $26,900 that you invested gets cut in half. Scary for sure, and definitely possible. Like anyone, I don’t want to see my hard earned money lose half its value – even if it is just on paper.
The thing is, when you’re just starting out your investing career, it’s SO EASY to make your money back just by continually investing. You can’t recover your million dollar portfolio just by putting more money into it – if your million turns to $500k, you’re not going to get it back to a million unless you’ve got an obscene amount of money.
But a relatively small amount early on in your investing career – your $26,900 that is now $13,450 – that will easily be topped off just by continuing to invest. Throw another $26,900 next year into your remaining $13,450 and suddenly, you’re back above $26,900 and then some. You just balanced the loss with your own contributions. And don’t forget that your original $26,900 is still kicking around there in the background, waiting to come back into play.
Someone maxing out all of their retirement accounts can pretty much cover any of their own losses for the first few years of their investing career. Most of the time, your investments will have recovered in value by then. From a psychological standpoint, who cares if the market is dropping when you begin your investing career. With continuing contributions, it just looks like nothing is happening with your investments. Your portfolio might lose value, but you can just keep adding to it until it’s where it was before.
Final Thoughts
For the new investor starting out their working career, you can pretty much just ignore the market. Unless you’ve got hundreds of thousands to invest today, you’re pretty much investing peanuts when you look at what your investments will be worth in the future. If you lose money, who cares. You’ll make it back one day and you’ll just keep making up any paper losses with your own recurring investments. In the end, you won’t really feel like you’re losing anything – so long as you keep investing. The only way you can screw things up is if you freak out like everyone else will tell you to do.
In contrast, if you wait it out, there’s actually a real chance that you lose money. The market will drop one day – that’s a guarantee – but it might never drop to the level that you had a chance to buy. Someone who waited in 2012 or 2013 to start investing might never get a chance to invest at those prices. They actually lost something by choosing to wait for the next big crash.
So don’t wait. Just get started now if you’re a new investor. Because, honestly, it doesn’t matter yet. You’re in the ultimate position for any investor – you have nothing to lose.
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More Recommended Investing App Bonuses
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Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link.
- Brex. Brex is a free business cash management account that is currently offering new users a $250 Amazon gift card if you sign up using a referral link and meet certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $50 for opening an account.
- Albert. A great free app I use to track my finances and save more money. You can also earn a $150 signup bonus if you open a free Albert cash account.
Feel free to send Kevin a message here.
Hi. I enjoyed this article. However, I noticed you mentioned people “early in their career.” I’m not that. I hope to retire in 20 years and just started investing. I believe the basic premise of “start now” still applies, correct?
Start now definitely applies. I wrote the post in response to new grads that ask me whether to wait for a correction before they get started, but it applies to pretty much anyone who is still starting. It’s just more likely that a new grad will also be the new investor.
I’m really glad my younger self did the “set and forget” back when I started my career. Something to be said for dollar-cost average investing and letting the compounding magic take it from there. Nice post, FP!
Thanks Cubert. You definitely did it right.
For people still building their investments, market volatility is a good thing. Using dollar cost averaging you get to purchase shares at a discount and lower your average price.
Now, for those of us who have already retired, volatility is another topic altogether 🙂
Yep, if you’re late in your investing career, that’s a whole different world. But early on, nothing the market is doing matters.
Great post and suggestions. Tune out all of the noise. By dollar cost averaging an investor is able to capture the average price of stocks. When you contribute to a 401k, you make 52 or 26 times per year and you get the average price. When you do that over many decades, you will buy at all of the different stages of the business cycle.
Right you are. And for most people, dollar cost averaging is just going to happen by necessity. No choice really because most of us don’t have hundreds of thousands to invest all at once.
The best tip we can share is to automate everything! Once you automate your savings and investing, wealth will come.
Automating is so important! You automate your savings and you don’t even notice that you’re saving money. It’s amazing how you can get used to living on any income if you just automate.
Slow and steady wins the race 🙂 it’s all about TIME IN the market rather than TIMING the market
Amen brother!
Starting now is so true. The correction will come, but nobody knows when! I believe that even if we were to see a major correction, you are not going to lose 50% of your value overnight (Provided you know what you are doing)
For new investors that fear of buying at the top of the market is really exaggerated, when you consider how long they will actually be investing for.
I get the concern people have, but yeah, it’s super exaggerated. Really, even in the worst situation, they shouldn’t see their investments drop by that much in nominal terms as long as they just keep investing.
Yes! I try to ignore market hype and the ups/downs… all it does is make me wonder how my $$ is doing. I’d rather invest wisely, ignore it for now, and see how I fair down the road 🙂
Yep! Totally agree!
I’ve learned that the best time to do almost anything money or business related is “now”. I used to wait until all conditions were perfect to move forward, but here will never be a truly perfect time.