Market strategists are waiting for the markets to bottom out, but investors are likely to turn away from the sidelines and buy stocks. In fact, the S&P 500 is down more than 16% from its high at Friday’s close, while the Nasdaq Composite is down nearly 27% from its all-time high. Stocks launched a comfortable rally on Friday but remained negative throughout the week, raising questions about whether this latest bounce represents a change in market sentiment after all. “The correct answer is to never stop buying,” said Josh Brown, CEO of Ritholtz Wealth Management. “You don’t have to wake up every day and face the question if today is the day to buy.” If you’ve been waiting to get back into stocks, here’s how to get started. Knowing your time horizon Investors should be aware of their goals in terms of the money they put back in the market. Dollars that are stored longer term may be better suited to beat daily volatility. Meanwhile, the money needed in the near term should be held in cash or in short-term fixed income instruments. How you get back into the market is also important: You can get your average dollar cost in stocks or, if you have a pile of cash on the side, you can make a lump sum purchase. A 2021 study from Northwestern Mutual found that investing a lump sum of $1 million all at once in stocks resulted in better cumulative total returns at the end of 10 years compared to a dollar cost average about 75% of the time. Don’t rule out the good habits of dollar cost averaging. Automating the incremental purchases in the marketplace over time removes pressure on the investment of time. “The way we express humility with investments is to diversify not just within investments but also in timing — and that’s what you do on average dollar costs,” said Kristen Benz, Director of Personal Finance at Morningstar. “You never buy at the exact right time, but you never buy at the wrong time.” Where do you buy? Investors who return to the market must decide where they will put their money. Don’t expect previous bull market leaders to be at the front of the pack going forward, said Ritholtz’s Brown. “I think the smart strategy in a market like this is to look for areas that are showing relative strength against the rest of the market,” he said. “These are the stocks that fall the least on very red days.” Brown said energy stocks along with oil and gas companies fit the bill. He also highlighted the high quality dividend payers, the value of small capital and defense contractors on that list. If you’d rather not choose among individual stocks, consider targeting broad diversification through cheap exchange-traded funds — or even balanced funds or target-date funds, if you really can’t act, Morningstar Benz said. “The beauty of target date funds is that they are buyers in lower markets and want to maintain some kind of target allocation,” she said. “They’re there on the bad days, leading exposure to stocks, which is something we retail investors tend not to do.”
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Market strategists are waiting for the markets to bottom out, but investors are likely to turn away from the sidelines and buy stocks.