When is the right time to invest in stocks and shares? If you have some spare cash you don’t need for the next five years, the answer to that question is probably now. But perhaps not for the reasons you might think.
As an investor, your aim is to make a profit by selling the assets you have bought for more than you paid.
So, ideally, you want to buy when prices are low and sell when they peak.
However, it’s not easy to second-guess the stock market. If it were, there would be a lot more billionaire investors in the world.
Advisers, therefore, recommend concentrating on spending as much time as possible in the market, rather than waiting and trying to pick the best time to invest.
And if you accept that logic, the sooner you invest, the better.
The best time to invest in stocks and shares is when you have the financial security and time to leave your money invested for at least five years.
Investments can both rise and fall in value. However, historical data shows that markets tend to climb over time.
By giving yourself at least five years or more, you should have time to ride out the short-term ups and downs and walk away with a profit.
Also, the longer you invest your money, the more time you have to take advantage of compound returns, which you get by reinvesting dividends or capital growth.
There are lots of different ways to invest in stocks and shares.
If, for example, you’re worried about losing money by investing just before a market downturn, one option is to drip-feed your money into the stock market by investing regularly rather than all in one go.
This approach, known as pound cost averaging, ensures the price you pay for an asset averages out over a year or more, meaning you never need to worry about losing out by buying at the top of the market.
When markets are down, you’ll get more for your money. And when markets are up, you’ll get less for your money but will still be quids in on your existing investment.
It’s a good way to get into the savings habit, especially as most investment platforms allow you to invest as little as £50 a month.
However, you may still earn less overall than you would by investing a lump sum and simply leaving it to grow.
Whatever your strategy, it’s also always worth maximising your tax savings by investing in the stock market within an investment ISA such as a stocks and shares ISA, where you can currently place up to £20,000 each tax year, sheltering any growth from income, dividend and capital gains tax.
The risks involved in investing convince some people to stick to savings accounts.
But while cash may seem the safest option, its value will generally be eroded by inflation over time, even if you stash it away in an account paying a good interest rate.
This approach will eventually leave you with less spending power – or bang for your buck – than when you first paid it into the account.
That said, it’s important to have some cash savings you can turn to in an emergency, as this rainy-day fund will help prevent you from dipping into your investments at the wrong time – for example, following a recent drop in value.
The general consensus is that you should have enough cash put aside to survive for three to six months if necessary.
And once you retire, the recommendation is to have enough cash savings to cover your essential expenses for at least one year.
Whatever kind of ISA you hold (you can invest in stocks and shares via junior ISAs and lifetime ISAs as well as investment ISAs), keeping a small amount of your total investment in cash to cover related charges, such as trading fees, is a good idea.
Investing in the stock market is a long-term strategy that should yield better returns than a savings account over five or ten years.
And the longer you spend in the market, the higher your returns should be – especially if you manage your risks by investing in diverse sectors.
However, the value of your investments may fluctuate dramatically during that time, so you need to be confident enough to leave the money where it is, especially when prices are falling. Otherwise, not only do you crystallise what was until then only a loss on paper, but you also run the risk of missing the point at which the market turns.
That’s why it’s important to be sure you can manage without access to the money you invest in the stock market for at least five years.
It’s also why it’s more about whether it’s a good time for you to invest in stocks and shares rather than a good time for the market in general.
