There is a big sale happening out there that some of you may not be familiar with. The stock market is currently on sale.
While I’ve intentionally stayed away from writing about the stock market and investment philosophy on my blog, for a few reasons, I decided the current stock markets volatility was a reason to break my self-imposed rules and write about it. Because my blog is focused on personal finance and fashion, I couldn’t ignore this obvious intersection of shopping sales!
For those of you who haven’t been following along closely, the stock market (market) has been falling over the past few weeks. Prior to this market had been on an upward trend hitting new high. It has since fallen over 10% from those highs creating what we in the investment world call a pullback.
A few of primary drivers for this pullback are fears around the coronavirus and political uncertainty. I could go into a whole blog post on the stock market and it’s what causes it the market to go up and down but I will refrain. One reason is because I’d rather focus my posts on personal finance and planning topics and secondly because there are so many other great bloggers out there that focus all their content on the market and investment strategy and they absolutely crush it!
If you are interested in checking out these master investment bloggers, I’ll link below a few of my favorites to read.
If the market is going down, why didn’t I call this post ‘Market Crash’ or ‘Your Net Worth is Dropping”? The reason is because as young professionals with a long investment time horizon in front of us, we shouldn’t look at these periods of negative stock market performance as scary, we should look at it as the ultimate sale and buying opportunity.
To put it into shopping terms, think of the stock market as having a 10% off sale. Granted not the most alluring of shopping sales. To put into perspective, in Chicago that is the equivalent to our sales tax. Not much to get excited about. In the stock market, a 10% sale is fairly significant. To put it in shopping terms, I would equate it to your favorite store, that hardly ever goes one sale, finally hosting a sale. It doesn’t happen all the time but when it does, it peaks your interest.
Before you get too excited an start depositing money into your investment accounts, the equivalent to filling up your cart with on-sale purchases, take a moment and evaluate if now is the right time to participate in the sale.
I’ve already written on the topic of when to become an investor in this post . The executive summary of that article is there are three criteria that should be met before you dive into the stock markets. As a quick refresher those are:
- Fully funded emergency fund
- Clearly defined financial goals
- Zero credit card or consumer debt
Even if you have checked these boxes, there are a few more things to consider. Especially as it related to bullet point number two, your financial goals.
Types of Financial Goals
When creating SMART financial goals, the last competent of building any goal is “T” which is time bound. When would you like to accomplish said goal? When it comes to financial goals, the time component is one of the most important factors as it will dictate what strategies can be used to support the success of the goal. An example of one of those strategies is investing in the stock market to allow assets to grow and create wealth.
When working with clients I challenge them to place goals into one of three “time buckets”:
- Short-Term Goals: 6 months to 2 years out
- Mid-Term Goals: 2 years to 7 years out
- Long-Term Goals: 7 years or more away
Each time bucket has a unique strategy that should be implemented to support the success of the goal.
Without going into a ton of detail and recreating my investments 101 class, the reason it’s recommended to approach short-term goals differently from mid-term and long-term goals is because the market moves in cycles. Much like there are business cycles and life cycles, the market also goes through cycles. These phases are expansion, peak, contraction and trough. On average, a full market cycle is around 7 years.
If you have a financial goal that you’d like to achieve in the short-term, you would be taking a big risk by subjecting all your savings to the stock market cycle. The risk being that there could be a scenario where it’s time to make your big purchase and the market is in a period of contraction. In this case, your investment account value could be lower than the amount you need to meet the financial goal. If that were to happen, you wouldn’t be able to meet that goal or would need to pull funds from other goals to meet that short term goal, which is counterproductive.
Because the stock market’s movements are unpredictable, it’s not recommended that funds earmarked for short-term goals are invested in the stock market. To give a personal example, while I recognize the markets are on sale and that this would be an ideal opportunity to use the cash we have in our savings accounts to invest in the market, my husband and I have decided to hit pause. This is because we are looking to purchase a home in the next 6-12 months and don’t want to risk those savings in the stock market.
In the case of long-term goals, financial goals that are 7+ years away, the stock market is a great place to invest and grow wealth. The idea being, that there is a long enough time horizon to complete a market cycle (or three) before the funds will be needed for the financial goal.
Some examples of long-term financial goals include, but not limited to, starting a business, a future company equity purchase, buying a second home or financial independence (a.k.a retirement). It’s common for long-term financial goals to be less articulated than short-term goals. If you fall into this camp, you are not alone! The point here is if funds aren’t clearly marked for a short-term, those funds are eligible to be invested in the stock market.
Time to Shop?
Going back to where I started this post, the stock market is experiencing a pullback. Said another way, the stock market is on sale which has created a great buying opportunity for funds not earmarked for short-term goals. If you find yourself with an over funded emergency fund, I would consider re-deploying those funds into one of your investment accounts. Given the time of year, this could be a great opportunity to make those Traditional or Roth IRA contributions for tax year 2019 and 2020.
Like all my posts, I hope this article encourages you to revalue your financial goals, short and long, and take inventory on the progress of those goals. If you find funds that are unaccounted for, extra emergency fund or short-term goals, consider taking advantage of the current market pullback and get invested. Any questions on navigating this process, from goal building to picking the right investment account or investments, feel free to reach out!
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