Market strategists are waiting for the markets to bottom, but investors sitting in cash may need to step off the sidelines and buy stocks. Indeed, the S&P 500 fell more than 16% from its all-time high at Friday’s close, while the Nasdaq Composite was down about 27% from its all-time high. Stocks launched a relief rally on Friday but were still negative for the week, raising the question of whether this latest rally finally marks a change in market sentiment. “The correct answer is to never stop buying,” said Josh Brown, CEO of Ritholtz Wealth Management. “You shouldn’t wake up every day and wonder if today is the day to buy.” If you’ve been waiting to dive into stocks again, here’s how to get started. Knowing Your Time Horizon Investors should be aware of their goals for the money they put back into the market. Dollars stored for the long term may be better suited to weather day-to-day volatility. Meanwhile, money needed in the short term must be held in cash or short-term fixed-income instruments. How you return to the market also counts: You can invest in dollar-denominated stocks on average or, if you have a pile of cash, make a lump-sum purchase. A 2021 Northwestern Mutual study found that investing $1 million in stock all at once and completely resulted in better cumulative total returns at the end of 10 years compared to the dollar cost average in nearly 75% of the time. However, do not detract from the good habits of the dollar cost averaging. Automating incremental purchases in the marketplace over time removes the pressure to time your investments. “The way we express humility with investments is to diversify not just within the investments, but within your timing — and that’s what you do with dollar cost averages,” said Christine Benz, Morningstar’s director of personal finance. “You never buy at exactly the right time, but you never buy at exactly the wrong time either.” Where do you buy? Investors jumping back into the market have to decide where to put their money. Don’t expect the leaders of the previous bull market to lead the way in the next run, Ritholtz’s Brown said. “I think a smart strategy in a market like this is to look for areas that are relatively strong relative to the rest of the market,” he said. “These are the stocks that fall the least on very deep red days.” Energy stocks, along with oil and gas companies, fit the bill, Brown said. He also highlighted high-value dividend payers, small-cap value and defense contractors on that list. If you’d rather not prefer individual stocks, consider seeking broad diversification through low-cost, publicly traded funds — or even balanced or target-date funds, if you’re really out of hand, Morningstar’s Benz said. “The great thing about target-date funds is that they are buyers in down markets and want to maintain some sort of target allocation,” she said. “They’re there on the bad days and supplement the equity exposure, which is something we individual investors tend not to do.”
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Market strategists are waiting for the markets to bottom, but investors sitting in cash may need to step off the sidelines and buy stocks.