The stock market in 2022 has been like a roller coaster. Unfortunately, unlike a real roller coaster, the ups and downs in the stock market are much less fun for long-term investors than the ups and downs, and we’ve certainly had a lot of downsides so far this year.
This raises an important question: Given all that insane volatility, is it safe to take your money out of the stock market or invest it for now? As with most questions about the market, there really isn’t a one-size-fits-all answer. Still, if nothing else, recent market moves show that it’s important to organize your own financial home.
Why your own financial picture matters when it comes to investing
Stock market declines are often accompanied by job losses. This is at least partly because many companies use stock as a form of currency – exchanging it for cash or using it instead of cash to pay for their expansion. When the market falls, it becomes harder to access the stock in that way, which ultimately dilutes the investment in expansion.
Due to which many times the job is lost. After all, people who were hired or contracted to complete expansion projects are not needed if the expansion is not going to happen. Even if a business spreads those expansion projects among its existing employees, if those projects go away, jobs are lost.
If, as a result, if you find yourself out of a job at the same time your investments dwindle, you could wake up to a world of financial hurt if you are not prepared. After all, your bills don’t go through just because your income does. If you can pay those bills, then by selling your stock when it is low, you will have so little investment to participate in any market recovery.
So what does a solid financial picture look like?
There are three parts to a solid financial picture: debt control, an emergency fund, and a reasonable time frame. For Debt Control, It’s Really Important That You Pay almost all your debts. The only ones that it makes sense to keep are those for whom all three of the following factors are true:
- It’s at a low interest rate—either interest-free or a low-single-digit rate.
- It has a fair payoff — low enough that you can pay without seriously affecting your lifestyle.
- It serves an important purpose for your future – such as giving you a place to live, a way to earn a living, or a means to keep you alive.
using the debt avalanche method Paying off all other loans can help you reduce your debt load fairly quickly.
Once your debt is under control, building an emergency fund of three to six months’ worth of expenses can help if you find yourself without a job during a downturn in the market. No, you can’t overcome the loss of an extended job with just a six-month emergency fund, but you can usually buy enough time to get by at least. some Alternative source of income is coming.
On a somewhat related note, it is important to have a suitable time horizon for any stock investment you make. The money you’ll need for the next five or so years isn’t in stocks. This is because returns are never guaranteed in the stock market. With a time period of five years, you at least give yourself a fighting chance of seeing positive returns before you redeem your shares.
If those pieces are in place, now might be a good time to invest.
As long as the rest of your financial house is in order, there may be a better time to invest than when the market was at its all-time high. After all, thanks to the recent stock decline, every dollar you invest can buy many more shares of the same great companies you could have previously bought at a higher price.
Of course, there’s still no guarantee that the market will recover quickly, but if your overall financial house is in order, it becomes that much easier for you to wait for things to happen. So make today the day you commit to setting that solid foundation. This way you can invest even in volatile times for the potential to generate strong returns over a long period of time.