As the old idiom goes, you’ve got to be in it, to win it. That’s certainly true of investing. But with fears of recession around the corner, along with 2022 losses that we haven’t experienced since the Great Recession of 2008, it’s easy to see why one might hesitate to enter the market today.
For those investing for the long term, however, ignoring the macro fear and negative returns can give you an opportunity to buy for cheap. Or cheaper, anyways.
The market fear and results of last year may have discouraged many younger investors. According to a survey by Morning Consult, 49% of those in the 18-to-25 age range (Gen-Z) owned at least one investment product, down from about 60% the year prior. More shocking, the rate of those owning an investment product among 26-to-41-year-olds (Millennials) fell to 57% from 70% in 2021.
For those simply seeking an opportunity to start, it appears that a window has opened. With price-to-earnings (P/E) ratios dropping from recent highs and now sitting at around 19.7, new investors have a cheaper spot to enter. This reduction can dramatically hurt someone just entering retirement but provides a great spot for those with long-term aspirations.
And, for younger investors, it provides an opportunity to understand the value of buying now no matter what the market might or might not do tomorrow.
Cheap Compared to What?
When evaluating an investment over decades, using P/E may not provide the best tool. For trailing P/Es, it weights the price of the stock to earnings – or what the company has made. For forward P/Es, it’s about evaluating the price of the stock to earnings next year. Neither evaluate the earnings of the market 30 years from now nor would an estimated 30-year P/E provide a reliable measure.
Over the past 40 years, the average P/E of the S&P 500 came in at 21.9, which indicates that the market is currently cheaper than the historical average. But the P/E average from 1971 to today fell in at 19.4, which would signal today’s market is closer to average, when using such a mark.
The same battle can be waged when comparing to more recent figures. The P/E looks like a deal compared to December 2020, when it stood at nearly 40. But when looking at December 2018, the number looks loftier, as the P/E then was under 19.
Looking for that perfect time to jump in, based on this measure can leave you doing a two-step, with one foot in and one foot out. Based on recent history, though, it certainly provides support to landing a cheap spot to purchase now.
Stretching Your Investment Dollar
Buying more now, when asset values drop creates a real opportunity for you to supercharge your savings if stocks rise in the future. By buying now, you’re purchasing more assets for the same amount of price than if you waited until next year, and the market has already rebounded.
It’s simple math and highlights the value of dollar-cost averaging. When stocks are cheap, if you’re putting in a specific amount of money each month, then you will gain more shares than when stocks are expensive. If you invest $500 in a market index fund when it’s priced at $250 per share, then you gain two shares. If that rises to $350, then you gain about 1.4 shares. Again, simple math.
This gives those that want to begin their investing journey a potential opportunity to begin when their money will go a little further. While inflation may have impacted the ability to buy food, it has made stocks cheaper in the short term. You might as well take advantage of a deal while you can.
Market Analysts Aren’t Soothsayers
The other reason to buy in now? The prognosticators don’t know. While many economists expect a recession in the next year, how deep of a recession we experience remains to be seen. Nor do we know how such a pullback will impact market returns. Some expect the market to do poorly this year while others expect it to end positively.
As someone who plans to invest for the next 30 or 40 years, however, if there’s a pullback, it just means you will get more for your investment buck if you continue to buy shares while others sell. If, instead, the market shows resiliency, then you still probably expect the U.S. economy to continue to grow over the next few decades. This indicates that investments, when looking long-term, could still be cheap, even if the market appears expensive today.
Instead of worrying about the right time to dive in, remember that the right time is typically now.
And, with the market slightly cheaper than we’ve seen recently, what better time to start?
This article was written by Ryan Derousseau from Forbes and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected].
