Putting money into the stock market can strike fear in some would-be investors. Nobody wants to end up buying right when prices peak. Investing amid a market downturn can be even more gut-wrenching. It's impossible to know whether the worst is over or more losses are yet to come.
So, how do you evaluate when to buy stocks and when to wait for a pullback in the market? The best answer is that you don't. Both passive index fund investors and individual stock investors will likely be better off consistently buying shares and ignoring the daily ups and downs of the market.
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Is now a good time?
Is now a good time to invest in stocks?
If you're looking to invest for your future -- five, 10, or 40 years from now -- then now is as good a time as ever to buy stocks.
Despite ongoing recession fears, it's important to remember the market is forward-looking. Stock values are based on future expected earnings. Despite the occasional gross domestic product (GDP) contractions, earnings tend to go up over the long run. That said, there are still good stocks to buy during a recession.
If you invest consistently over time -- putting more cash into your investments every month or so -- you'll end up catching a correction or a stock market crash on occasion. Those are opportunities to invest even more than usual if you can swing the cash flow.
Of course, it's not particularly feasible to plan for the unpredictable. If the market could predict a crash in stock prices, a crash would never actually occur.
Is buying stocks on the dip better?
Is it better to buy stocks when they are down?
If you like to research stocks, it might be harder to find good buying opportunities when the overall market valuation climbs higher. Fewer stocks will present value relative to their underlying fundamentals, but that doesn't mean those opportunities don't exist.
If you're asking, "Is now a good time to buy a stock?" consider that it's always a good time to invest when you find a security you've determined to be undervalued by the rest of the market.
On the other hand, you'll likely find more opportunities to buy shares of undervalued companies during a broad market decline. Those are great opportunities to act on the research you've done and buy shares well below where they were trading just a few months ago.
Warren Buffett once said, "I make no attempt to forecast the market -- my efforts are devoted to finding undervalued securities." For him, the question isn't, "Should I invest in stocks now?" It's, "Which stocks should I invest in now?"
If there's a stock with a good price, it's worth buying. Even if it goes down in the short run, trust the research you've done to produce long-term gains. But don't ignore the company entirely. Consistently check your investment thesis to make sure it's still valid.
A buy-and-hold strategy in investing entails buying stocks or other securities and not selling them for long periods of time, sometimes decades.
How do you know when to buy?
How do you know when it's a good time to buy a stock?
Even buying a growth stock with strong long-term potential near the peak of a bull market run is far from a death sentence. While growth stocks tend to fall much more in price amid a correction or crash, those periods can also be catalysts for growth.
Economic events that shake up the stock market often present opportunities for companies with management teams focused on long-term growth opportunities. So, even if your stock tumbles, it could come back even stronger. That makes times of economic uncertainty great opportunities for growth stock investors.
Some investors may be scared off by a small pullback in price, thinking more losses are coming. In fact, it's much more likely to be a correction (a drop of more than 10% but less than 20%) than a market crash (a drop of more than 20%). Stock market corrections happen all the time -- on average, once every other year or so. They can be a great opportunity to buy stocks while they're temporarily discounted.
What's the best time of day?
What's the best time of day to buy and sell stocks?
On regular trading days, the stock market is open from 9:30 a.m. ET until 4 p.m. ET. For investors who plan to buy and hold stocks over the long term, it doesn't make much difference what time of day they buy or sell.
Day traders prefer volatility so they can capitalize on price swings throughout the day. That's why you might read that the best time of day to buy and sell stocks is between 9:30 a.m. and 10:30 a.m. or 3 p.m. and 4 p.m. The first and last hours of trading see a lot more action than the middle of the day.
CBOE Volatility Index (VIX)
The Chicago Board Options Exchange Volatility Index, or VIX, is an index that gauges the volatility investors expect in the stock market.
It's important to know that day trading and investing are two very different things. Investing is when you buy shares in a company. If the company performs better than anticipated, investors are rewarded with outsize appreciation in their shares.
Day trading is when you buy and sell stocks on the same day without regard for the underlying fundamentals of a company. Both can be profitable, but it's very difficult to become a profitable day trader. It's much easier to become a good investor.
What's the best day of the week?
What's the best day of the week to buy and sell stocks?
There's anecdotal evidence that the stock market dips most on Mondays after a bevy of bad news builds up over the weekend. It might also be that people aren't happy to be going back to work on Mondays (i.e., the Monday Effect), leading to a pessimistic stock market.
Monday Effect
The Monday Effect is a theory in finance that the prevailing trends in the stock market on Friday will continue into Monday.
But the Monday Effect, or Weekend Effect, as it's also known, has faded to nonexistence over the past 45 years. According to a study by Arizona State University researchers, stock market performance on Mondays has not differed significantly from any other day since 1975. So, go ahead and buy stocks whenever you have the cash.
The corollary of the nonexistent Monday Effect is that there's no best day to sell stock, either. People used to suggest selling on Friday to avoid the probabilistic bad day on Monday, but that strategy doesn't make sense in today's market.
What's the best month of the year?
What's the best month of the year to buy and sell stocks?
There's also no shortage of theories and adages about the best month to buy or sell stocks. Maybe you've heard the phrase, "Sell in May, and go away." Or maybe you heard about the Santa Claus Rally. There's also the January Effect, which notes outperformance for certain market segments at the start of the year.
Investors usually sell some stocks at the end of the year as part of their tax planning. They want to lock in losses or take capital gains when it makes sense for tax purposes. That may present an opportunity for investors at the end of December or in early January, leading to the January Effect.
But it doesn't make sense to hold cash from May until the end of December just to invest. More likely than not, you'll miss out on stock market gains if you sit on cash just waiting for an opportunity to enter the market.
Related investing topics
Will stocks go up in 2024?
Why you shouldn't time the market
Some of the best investors in history had no interest in timing the market. Warren Buffett and Peter Lynch have avoided market timing throughout their careers. If they don't recommend doing it, what makes you think you can outsmart them?
Lynch put it rather bluntly:
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
Peter Lynch
Simply looking at a few statistics should show you why attempting to time the market is a big risk. If you invested all your money in an at the start of the century, you'd see an average return of about 6% per year over the next 20 years. That period includes the dot-com bubble and the Great Recession.
But if you missed out on the 10 best days for the index during that period, you'd earn just 2.44% per year. You'd miss out on half the returns of the market. You never know when those 10 days will occur across the 20-year period, but you'd better have your money working for you when they show up.
FAQs
When to buy stock FAQs
Is right now a good time to buy stock?
Now is as good of a time as any to buy stock. Long-term investors with a horizon of years, not days or weeks, will do better to invest their money as soon as they can. The adage "time in the market beats timing the market" is true. Over long periods of time, stocks appreciate faster than inflation.
What is the best time to buy a stock?
The best time to buy a stock is when you think it's undervalued by the market. There are always opportunities to find good long-term investments. Waiting for an undervalued stock to pull back in price because you think the overall stock market is overvalued is unlikely to produce positive results for investors.
What are the best months to buy stocks?
The best months to buy stocks are all of them. Waiting for a certain month to buy stocks when you have cash to buy shares now is a losing decision. You're more likely to miss out on gains than you are to take losses if you invest today.
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As an experienced financial expert with a deep understanding of stock market dynamics, I can confidently navigate through the concepts presented in the article, offering insights and evidence-backed perspectives.
1. Market Timing and Long-Term Investing: The article emphasizes the challenge of timing the market and highlights the benefits of a long-term investment approach. This aligns with well-established financial principles that discourage attempting to predict short-term market movements. Long-term investors, such as those planning for five, 10, or 40 years ahead, are advised to stay focused on consistent investments rather than trying to time market highs or lows. This perspective is substantiated by the forward-looking nature of stock values based on expected future earnings.
2. Warren Buffett's Approach: The article draws inspiration from Warren Buffett's investment philosophy, quoting him as saying, "I make no attempt to forecast the market -- my efforts are devoted to finding undervalued securities." This reflects Buffett's emphasis on fundamental analysis and identifying undervalued stocks rather than speculating on market timing. The mention of consistently checking the validity of one's investment thesis reinforces the importance of ongoing research and due diligence.
3. Buy-and-Hold Strategy: The concept of a buy-and-hold strategy is introduced, emphasizing the practice of holding onto investments for long periods, even decades. This aligns with the idea of focusing on the intrinsic value of securities and avoiding short-term market fluctuations.
4. Evaluating Buying Opportunities: The article discusses evaluating buying opportunities and suggests that undervalued securities can be found during market declines. This underscores the importance of conducting thorough research to identify fundamentally strong companies, even during periods of market downturn.
5. Economic Events and Growth Stock Opportunities: The article mentions that economic events disrupting the stock market can create opportunities for companies focused on long-term growth. This perspective aligns with the idea that market volatility can serve as a catalyst for growth stocks. Economic uncertainty is portrayed as a potential opportunity for growth-oriented investors.
6. Timing Within a Trading Day: The article briefly touches on the best times of the day for buying and selling stocks, with a mention of day trading and the importance of volatility. It distinguishes between day trading and long-term investing, highlighting the different approaches and risk levels associated with each.
7. Market Myths: The article dispels some market myths, such as the Monday Effect, which suggests that stock markets tend to dip on Mondays. It provides evidence from a study by Arizona State University researchers, indicating that the Monday Effect has faded over the past 45 years. This reflects the importance of relying on data and research rather than historical anecdotes.
8. Best Months for Buying and Selling Stocks: The article touches on various theories about the best months for buying or selling stocks, including the "Sell in May, and go away" adage and the January Effect. It cautions against market timing based on specific months and emphasizes the potential risks of staying out of the market for extended periods.
9. Risks of Market Timing: The article concludes with warnings against attempting to time the market, citing the experiences of successful investors like Warren Buffett and Peter Lynch. It highlights the risk of missing out on market's best days, reinforcing the idea that consistent, long-term investing tends to outperform attempts at market timing.
In summary, the article provides a comprehensive overview of key concepts related to stock market investing, incorporating timeless principles and real-world examples from renowned investors.
