Is now a good time to invest or should I wait for a correction?

Despite the recent correction in January, the market valuations are still high. Many feel that another correction is just around the corner, and they may be right.

With valuations are as high as now they are and the persisting uncertainty about interest rates and liquidity, it is difficult to predict the market movement in the short term.

What if the market crashes immediately after you invest; is a valid concern!

If prudent investing is all about buying low and selling high; then, is now a good time to invest? 

Should I wait for a market correction?

On the other hand, the current bull run has been raging for the last 11 years. Even a global pandemic could only pause it for a few months. The markets fell briefly in March 2020 and recovered only in 6 months. 

Thanks to the extensive vaccination drive, mammoth stimulus cheques, and spectacular corporate earnings, the global economy and markets have recovered swiftly. They have, in fact, surpassed the pre-pandemic levels and are still looking strong.  

Many investors have been waiting on the sidelines for long, brooding over the lost opportunity wondering...

If now is the right time for them to invest, or should they wait for another correction?

So, how long can you wait? 

No one can predict where the markets are headed in the short term, and anyone who claims to know is either guessing or lying!

A correction may happen tomorrow.

Or the market could crash next week.

Or maybe in after two to three years. No one can really say.

And if that crash happens in two or three years, you will miss out on one of the best bull runs ever!

Even when there is a correction, the markets could move up quickly as they did recently and often in the past before you can take advantage of the situation.

If you are unsure about investing amidst a growing global economy, exceptional corporate earnings, and a strong bull market. In that case, you may be more skeptical when the market crashes, still waiting for the bottom to enter.

Or worse, maybe you have spent your savings on something else, or your financial situation could be different then!

But what if the bull run continues for another 4-5 years? People are speculating about a market crash from 2016, and now we are in 2022, and the markets are still strong!

The point is that we all know that what goes up has to come down someday, but we have no clue when.

We also know that what goes down will come back, and there is enough historical proof to support this theory.

So why wait?

When is a good time to invest?

When you are looking to invest for long-term goals like retirement or children's higher education, the best time to invest is now when you have the money. 

It is well-known that timing the market can be a challenge even for professional investors, so why waste the opportunity waiting for the right time to enter the market?

Instead, you may want to focus on your time in the market. Which is in your control, depending on how far and big your goal is. 

Above all, keep in mind that your investment decisions should be based on your financial needs and risk appetite and not on market timing. 

There are enough tools and strategies available to manage risks efficiently like;

• Goal-based investing

Goal-based investing creates an investment vehicle for each of your specific goals like children's higher education, retirement, immigration, property investment, etc.

These goals typically have different investment horizons and importance in your life. You can't let the market decide when and how you start investing for these goals. The more you delay, the more difficult it becomes to achieve them.

The best way to start is by preparing a Holistic Financial Plan, identifying your goals and priorities, and investing in separate plans for each of your objectives.

When you do so, you can build an investment strategy specifically for that goal, depending on its size, priority, and horizon.

For example, if you want to accumulate a corpus to buy a property in 5 years, you may follow an aggressive investment strategy. Because you can postpone or prepone this goal by one or two years depending on the market condition to withdraw your investment

But, if you are looking to invest for a non-negotiable goal like your children's higher education, then you don't have much leeway. You would need to make withdrawals in specific years, so you may have to take a more cautious approach.

• Robust asset allocation

Asset allocation in layperson terms is not putting all your eggs in one basket. It involves spreading money among two or more non-correlated assets. By choosing the right mix of assets, you can optimize your portfolio to grow wealth and protect capital. 

The following are the four levels of diversification you can choose from;

• Geographical diversification ( USA, Europe, UK, India, China, etc.)
• Asset-Class based diversification(Stocks, Bonds, Cash, Commodities, Real Estate, Art, and Cryptocurrency)
• Industry-wise diversification(Technology, Healthcare, Sustainable Energy, Consumer Staples/Discretionary, Energy, etc.,
• Market Cap Based diversification(Giant cap, Large Cap, Mid Cap, Small and Micro-Cap)

The asset allocation that works best for you at any given point in your life will depend largely on your investment horizon and your ability to tolerate risk.

• Dollar-cost Averaging

Dollar-cost averaging is an efficient strategy to mitigate market volatility by investing fixed amounts at regular intervals into a particular Stock/Mutual fund or ETF.

By doing so, you can buy them at different price levels every time. You can buy more units at a lower cost when the markets go down, thus averaging your overall holding cost.

The following chart from https://www.investingnote.com best explains the benefit of dollar-cost averaging. 

• Review and Rebalancing 

Periodic review and rebalancing of your portfolio are crucial for the success of your investment. 

Rebalancing is a process whereby you sell a specific portion of the assets that have gone up in value to buy assets that have gone down in value. 

Just like you trim your nails or hair, when they outgrow, you also sell a portion of the assets that have gone up in value to buy assets that are now relatively cheaper.

It helps you book profits on assets that are doing well and lower your average holding cost on investments that are not doing so well.

With the help of an expert financial advisor, you can manage risk efficiently using the above strategies to grow wealth and achieve your financial goals.

What are the best investment opportunities in 2022?

• Bluechip Growth Stocks

These are market and industry leaders with robust business models with very little or no competition. They also tend to have deep cash pockets, enough to withstand extended periods of crisis and buy out the competition if it emerges.

They have relatively lower debt on their balance sheets; hence they are not largely affected by rising interest rates. Also, they are in a better position to negotiate lower interest rates from lenders due to their size and clout.

Such companies can grow continuously because of their extensive investment in research and development, resulting in leadership in their core businesses and expansion into other verticals.

Source:https://www.investors.com/

• Value Stocks 

In simple words, value stocks are good companies at a discount. Typically when the sentiments are negative, and the overall markets fall, stocks of even good companies fall. Spotting and investing in such companies is called value investing.

It is much like buying premium brand clothing and footwear at a discount. 

Value Stock Eg: Coca-Cola, Berkshire Hathaway, Proctor & Gamble, etc.

• European, Indian and Chinese Equities 

As we know already that US equities have outperformed most markets in the last few years, there is a yawning gap between the US and other markets.

Also, with the recent regulatory challenges with China and Ukraine crisis in Europe, valuations are relatively cheaper.       

If you are an investor with a medium to long-term investment horizon, you can find value by investing in these markets. 

But what if you invest now and get it wrong, totally?

What if none of these strategies work for you!

Let's look at Sam's example. He started investing in US tech stocks(Nasdaq index) at age 35, with $40,000 just before the dot-com crash in 1999. He managed to invest additional investments every time just before a crash or a correction in $100k in 2007, $60k in 2010, and $100k in 2017.  

While his timing was worst, he never reviewed or rebalanced his portfolio. Today Sam is 57 years old and was laid off last year during the pandemic. 

Due to his age and rapid technology disruption, he finds it challenging to get a suitable job, so he is considering retirement. 

What do you think are his prospects? 

Do you think Sam can retire with the current value of his $300K investment? 

Was he better of keeping his savings in a bank instead of investing?

The following chart will explain better;

You can see from this chart that if Sam had invested at the worst possible time and just before every correction, his investment value would have quadrupled in 23 years to reach $ $1,254,665.91(418%). Instead, if he had kept his money in a bank, it would have just got $343,749.13(115%).

Alternatively, If Sam had started with a 40K investment and added $12K every year from 2000 to 2021, as a systematic investment, his investment would have grown to $1,454,550(478%).

So, now what do you want to do?

You can still be skeptical and wait for the right time, or you can be Sam!

But!

You can also be Smarter than Sam.

Hire a financial advisor, Cease the market opportunity by using efficient risk mitigation tools, and regularly invest your savings to grow wealth and achieve your financial goals. 

The choice is yours!

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