If you’re a younger investor, you may be wondering if you should use money you’ve saved for another purpose to buy stocks at today’s fire-sale prices.
Money expert Clark Howard isn’t a fan of this approach.
Thinking About Dumping Everything You’ve Got in the Market? Read This First
We’ve been getting a lot of questions at Ask Clark from people who want to know how best to take advantage of this unique moment in American history.
“My fiancé and I are 26 years old and have been saving to buy a house, but we see the Dow tumbling as an opportunity for investing,” one wrote.
“We have about $50,000-$60,000 we could invest and still have a strong emergency fund. When is the best time to invest, and what do you recommend investing in to take advantage of the stock market’s current position?”
Another wrote in to say, “I am saving $400/month for a car. I have $3,000 put away and I’m wondering if it would be a good idea to take advantage of the low market due to the virus and invest this money.”
But Clark cautions against taking everything you’ve got and dumping it into the market all at once.
“This is not a time to jump in — or jump out — of the market when you’re young. This is absolutely the circumstance where you put money in once a month or once every pay period. Because we don’t know when the bottom is or how bad things might get. And that’s why jumping in with both feet at a time when we don’t know the ultimate difficulty this is going to cause is not a good idea.”
To the contrary, today’s conditions are a perfect example of why prudent investors practice dollar cost averaging, according to Clark.
“Dollar cost averaging” is a fancy term for contributing to your retirement plan in equal amounts every pay period. If you have a 401(k) at work, you’re probably already doing this. The equal amount in your case is your typical payroll contribution plus any employer match each time you get paid.
However, if you’re sitting on money that you’re absolutely dead-set on investing, Clark has a formula he wants you to follow: Take that money and put it into investments in equal sums over the next six months.
That way you limit the downside risk of dumping everything into the market at the worst possible time. Likewise, if prices go way up from here, you’re never buying too much at once and overpaying.