You probably already know that you should be investing. Your hard-earned cash is actually losing value by the moment, because inflation robs cash of its value over time. You know that by investing in stocks, bonds, and other investment vehicles, you can harness the power of compound interest and increase your wealth.
But you may also be nervous. You’ve heard of bear markets, and you think one may be approaching. So you think you might take your money out of the market, stop investing for a while, and just let things sit in a bank. Is that a good idea?
Actually, no. Here are a few reasons why you should keep on investing.
Banks can’t match market returns
So how can you beat inflation? You need to put your money in a place where it will generate interest.
Bank accounts generate interest, so that’s one option. Savings accounts generally have higher interest rates than checking accounts do, so they are probably the better bet. But even the best savings accounts can’t match the kind of interest that you can earn when you invest in the market.
Banks have their advantages — they’re certainly nice and safe — but if you want to build wealth, nothing beats investing.
But what about that bear market? Stocks can go down — and then the bank would be better, right? Let’s address that in our next section.
The market tends to go up over time
Short-term fluctuations can make a market scary. You’ll be tempted to invest more at some times than at others. But you should remember this: Over time, the market tends to go up.
That doesn’t mean that we can’t have dizzying dips. If you’re near retirement, you’ll want to get more conservative with your investment strategies, because your prime time for using your hard-earned cash may come along sooner than the economic recovery. But if you’re young and earning money, then keep investing — even if the market looks rough. It will be back and growing in plenty of time before your retirement date.
You probably won’t manage to time the market
Of course, investing steadily in the market means that you’ll lose some money as the market goes down. You’ll gain more in the end when it goes up, so you’ll be OK, but you could theoretically make the most money by pulling your money back out of the market right before a big dip, and then buying back in at super-cheap prices. Then you could stay invested as the market rises, wait for the next dip, and repeat.
Great plan, right? Except that almost nobody pulls it off. Even the professionals who make their living doing these things tend to miss their guess when they try to “time the market” (as this technique is called). And the consequences of trying to time the market can be rough. So, generally, you’ll probably want to play it safe.
There are ways to make money in bear markets
Staying invested (and continuing to invest more) in bear markets can also give you the chance to try out new and more advanced trading strategies. A simple buy-and-hold strategy relies on stocks to go up, but there are plenty of ways to use put and call options to make money if stocks go down, too.
You’ll want to be careful, of course. Don’t risk more than you can afford to lose. But with leveraged trading strategies (and a few clever safety nets), you might be able to bet against the market during downturns and make money even as the numbers on the tickers stay red.