At some point or another, investors typically ask, “When is the best time to invest in the stock or bond markets?” Many experts agree that determining the best time to get in or out of the market can be nearly impossible, and that for most investors, attempting to time the market is not a practical investing strategy. Trying to determine exactly when one should aggressively invest or back out of the market takes a considerable amount of expertise, and monitoring market conditions can require a major time commitment. And remember, there are no guarantees when it comes to how the financial markets will perform.
It is human nature to let emotion influence investment decisions, especially during times of market instability. Uncertainty in the markets due to economic volatility and national or global political concerns often clouds your judgment, causing many to stop investing or pull out of the market entirely. However, individual crises do not necessarily have long term negative impacts on the market. While past history can not predict future results, historically, the market does decline immediately after a crisis, but typically rebounds within a relatively brief period of time.
Many professionals discourage investors from trying to time the market and suggest utilizing dollar cost averaging instead. Dollar cost averaging is the act of investing equal or fixed amounts of money at regularly scheduled intervals. With this investment strategy, an investor will buy more shares when the price of an investment has declined and fewer shares when the price has risen. Over a period of time, the average cost of the investment may be lower than if the investor had tried to time one large purchase to a specific price and date. While dollar cost averaging does not assure a profit or protect against a loss, it may reduce investment risk by preventing you from investing substantial amounts at the wrong time.
An added benefit to dollar cost averaging is that by investing on a regular basis, investors can avoid making decisions based on emotions, such as acting on the natural tendency to stop investing during a weak market. In order for this strategy to be effective, investors must continue investing during periods of falling prices.