For younger investors, such as the millennial set, it’s understandable if they’re nervous jumping into the market for the first time. It goes against the “buy low, sell high” speak that permeates investing basics. But when evaluating long-term strategies, such as retirement savings, then it shouldn’t enter the equation.
Certified financial planner Chad Carlson deals with this conversation almost daily, and he admits to his clients that a Dow Jones Index above 21,000 seems expensive today. But then he asks if it will seem expensive in three years? Maybe. What about five years? Or, 20 years?
To put the Dow price in perspective, calculate what its growth would be with a 7 percent yearly average rate (the historical growth rate) over the next 20 years. At its current price, you’re looking at a Dow that’s over 84,000. Now the current level looks like a steal.
Or if you want a more recent example, those who were worried getting in before the 2008 recession may have felt the S&P 500 Index price tag of 1,549 in October 2007 seemed expensive. Even including the deep decline during the recession, it has increased 60 percent since that 2007 mark.
“Start plugging away monthly amounts,” said Carlson, an owner at wealth advisor Balasa Dinverno Foltz. “Don’t just try to chase performance.”
The other reason it’s the right time to buy in: market drops provide cheap shares.
The worst decision someone could have made during the most recent recession was moving funds out of the market near the bottom for fear they would continue to lose more. Those who stayed in saw their savings return to pre-recession levels within about two years.
Those who left missed the opportunity to buy discounted shares of the funds they invest in. By staying in, they would have bought fund shares at a cheaper price, building the amount in their portfolio, which would then benefit them once the market turned back.
“Essentially you got a coupon to use towards your long-term retirement purchases,” Carlson said. “As a [long-term] saver you would love to have a correction to happen, because you can buy cheaper.”