With the Coronavirus pandemic, many cities across the country have shut down. While some people are working from home, many others have been furloughed or lost their jobs altogether. With this rapid decrease in economic activity, the stock market has taken a huge hit. Many people who had a big chunk of their network in stocks, have seen a sharp decline in the overall value of their investments. In the midst of all of this change, I’m staying the course. Here are 5 reasons I’m still planning to invest in the stock market:
1. I’m in it for the long-haul. Despite the low valuations of stocks at the current moment, the market will eventually recover. While the value of stocks may not bunce back in a couple months, over time the market will normalize. Since I haven’t sold any stocks, I haven’t actually lost any money. Unlike people who are close to retirement, I’m young and have just started my career. I have lots of working years left and don’t need the money I put into retirement accounts any time soon. By the time I retire, 20-30 years from now, stocks will be worth a lot more than they are right now. Thus continuing to invest in the stock market will increase my net worth over time.
2. It’s difficult to time to the market. Some investors my argue that since the market hasn’t recovered yet, people should temporarily stop investing money and wait until things recover to resume investing. I disagree. While that strategy sounds plausible on the surface, it’s difficult to implement in practice. Despite our best knowledge, it’s hard to “time the market.” No one really knows when the stock market will hit its lowest point and when it will be on the upswing. If you mistime it, which is highly likely since we don’t have a crystal ball telling us the exact date things will improve, you run the risk of buying stocks for much higher than you otherwise would when you start investing again and end up “losing money.” Since most of us don’t need money from our retirement accounts right now, we should keep investing as we wait for the stock market to rebound.
3. The price of stocks is cheap right now. With this economic downturn, many companies are not operating at full capacity or bringing in as much revenue as they once were. As a result, the economic value of these companies has decreased. Since the valuation is lower, the price of their stocks is lower. This is great news for me because it means it’s cheaper to buy stocks. Although I don’t invest in individual stocks, I can still get more bang for my buck through index mutual funds. Before the coronavirus, a few hundred bucks a month might have only allowed me to get a small percentage of stock in each of the major publicly traded companies. Nowadays, those dollars go much further. It’s as if I’m buying a lucrative investment at a discount. When the market finally does bounce back, the value of my investment will have increased exponentially. Since I can’t time the market to figure out exactly when the stocks will be at their lowest price (or available for purchase for the biggest discount), I “dollar-cost-average” and invest money each month into an index fund so that on average I will have gotten these stocks at a decent price.
4. It lowers my taxable income and student loan payment. Regardless of what the market does over time, continuing to invest in stocks through my employer benefits me in the short term. Since I mainly invest in index mutual funds (a portfolio of all of the stocks on the market) through my employer’s retirement fund, doing so lowers my taxable income. This means I don’t pay taxes on the money I invest towards retirement and thus less money is deducted from my paycheck for taxes each month. Since I pay less in taxes I will have more cash to spend after each check. Plus, lowering my taxable income by continuing to invest in my job’s 403b/401K also lowers my monthly student loan payment since my payment amount is a percentage of my taxable income. As someone who’s loans will be forgiven in 10 years, paying less each month for student loans means I pay less on my loans overall before they get forgiven entirely. This is a win-win.
5. I can write off the losses. There is no doubt that we are in the midst of a recession. As we continue to practice social distancing, companies are unable to operate at full capacity and their stocks may continue to decrease. This means that those near retirement may need to sell part of their stock portfolio to continue to fund their retirement, and thus may end up selling it for less than it was previously worth. While this may sound disheartening, there are certain things that can be done to minimize the burn. One of them is the fact that we can write off the losses against our taxable income. If you happen to sell some stocks at a loss, you can deduct that loss from your taxable income next year, if you itemize your taxes. Meaning a loss in value doesn’t really become a true loss. You get to recoup some of that money next year when you file your taxes.
My point? Despite the market downturn, I’m still planning to invest in the stock market. Doing so allows me to buy valuable stocks at a discount, lower my taxable income, increase my net worth over time and lower my student loan payments. I’m investing for long-haul and these benefits motivate me to stay the course.