Now is an ‘ideal’ time for young people to start building wealth, says investing expert – CNBC
I’m still thinking about a financial tweet I saw on New Year’s Eve.
It shows a screengrab from a TikTok picturing a young, smiling woman, whose username is cropped out. The superimposed text reads, “When the market falls at the same time you decide to invest, so you’re buying shares cheaper and can earn higher returns.”
It’s unclear to me whether the account that tweeted this was mocking her or not. Plenty of people in the replies were.
Others were defending her. And with good reason. While there is no shortage of laughable investing advice to be found on social media, this struck me as good, sensible stuff, especially given what the market has done of late.
The S&P 500 index is down more than 18% over the past 12 months, and many individual investments, such as prominent tech stocks and cryptocurrencies, have faired far worse. It’s enough to cause many investors to panic, when most market experts will tell you to do the exact opposite.
“A down market is actually an ideal situation for a relatively new and young investor who has signed up for a dollar-cost averaging approach in a retirement account such as a 401(k),” says Sam Stovall, chief investment strategist at investment research firm CFRA.
Dollar-cost averaging is a classic long-term investing strategy that involves investing a set amount of money into your portfolio at regular intervals. There’s no guarantee that the woman from TikTok is doing it or plans to. But if she is, here’s why she’s right to be excited that the market is down.
Market history is on your side in a down market
Describing the shares she hopes to buy as “cheaper” means that the TikToker is assuming stock prices will bounce back. In the short term, there is no telling whether they will or not. But over long periods, the broad stock market has reliably trended upward.
“The market is up in 73% of calendar years since World War II,” says Stovall. “You have to think that if the market is down one year, it’s likely to be up in the next.”
Historically, investors haven’t had to wait long to recover from the sort of down market we find ourselves in now. The broad market is currently down 20.5% from its January 2021 high, putting it in the territory of what Stovall calls a “garden-variety” bear market — characterized by a decline of 20% to 40%.
In the 10 times that’s happened since 1945, the market has bounced back to breakeven in 27 months, on average, according to CFRA.
“Understanding the speed with …….