The stock market has been something of a rollercoaster ride in 2022. Unfortunately, unlike a real rollercoaster ride, downs in the stock market are far less fun for long-term investors than ups, and we’ve certainly had plenty of down so far this year.
That raises a key question: Given that crazy volatility, is it safer to get your money out of the stock market or to keep investing for now? As with most market questions, there really isn’t a one-size-fits-all answer. Still, if nothing else, recent market moves show it’s important to get your own financial house in order.
Why your own financial image is important when it comes to investing
A stock market crash is often accompanied by job losses. This is at least in part because many companies use stocks as a form of currency, trading them for cash or using them instead of cash to pay for expansion. When the market falls, it becomes harder to justify using stocks in that way, ultimately reducing investment in expansion.
That often results in job losses. After all, the people who were hired or contracted to fulfill the expansion projects are not needed if the expansion is not going to take place. Even if a company distributes those expansion projects among its existing staff, if those projects go away, jobs become vulnerable.
If, as a result, you find yourself out of a job at the same time your investments are falling, you can wake up to a world of financial damage if you’re not prepared. After all, your bills don’t go away just because your income goes away. If the only way you can pay those bills is by selling your shares while they’re low, you’ll have far less invested to participate in any market rally that may occur.
So what does a strong financial picture look like?
There are three parts to a sound financial picture: debt control, an emergency fund, and a reasonable time horizon. For debt control, it is very important that you pay narrowly all your debts Almost the only ones that can make sense to keep are those for which the following three factors are met:
- It has a low interest rate, either no interest or a low single-digit rate.
- You have a reasonable payment, low enough that you can make the payment without seriously hurting your lifestyle.
- It has a key purpose for your future, such as providing you with a place to live, a way to make a living, or a means to stay alive.
Using the debt avalanche method to pay off all your other debts can help you reduce your debt load fairly quickly.
Once your debts are under control, creating an emergency fund of three to six months of expenses can help you if you find yourself out of work while the market is down. No, you can’t survive a prolonged job loss with just a six-month emergency fund, but you can usually buy enough time to at least get some input from an alternative source of income.
On a somewhat related note, it’s important to have a proper time horizon for any stock investment you make. The money you expect to need within the next five years does not belong in stocks. This is because stock market returns are never guaranteed. With a five-year time horizon, you at least give yourself a chance to see positive returns before you need to cash in your shares.
If those pieces are in place, now may be a good time to invest.
As long as the rest of your financial house is in order, now may be a much better time to invest than when the market was at its peak. After all, thanks to the recent decline in stocks, every dollar you invest can buy you many more shares of the same big companies that you could have bought before at a higher price.
Of course, there are still no guarantees that the market will recover quickly, but if your overall financial house is in order, it will be much easier for you to wait. So make today the day you commit to laying that solid foundation. That way, you can invest even in volatile times for the potential to receive stronger returns in the long run.
Chuck Saletta has no position in any of the listed stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.