My 24-year-old daughter, who has some cash reserves, texted me following a particularly brutal week on Wall Street. She wanted to know if she should open an investment account.
I replied with just two words: “Yes, ma’am.’’
My husband and I have encouraged her to start investing beyond her workplace retirement plan. Our aim is to broaden her perspective on wealth building, demonstrating how her savings could create a substantial investment portfolio for other long-term financial goals.
“Let your money work for you,’’ we often tell our three 20-something kids.
The reason: There’s one thing that young adults have that we older folks don’t. They have time to experience the highs and lows of the stock market.
Right now, we’re in a low brought on by President Donald Trump’s trade war. This self-inflicted volatility has understandably caused anxiety for many investors. I’ve spoken with individuals who have shifted their funds from stocks to bonds or deposit accounts.
Some vow to reenter the stock market when it’s less rocky. Others have said they’ll wait for the bottom and then plan to “buy the dip,’’ which means they intentionally buy more shares of a stock or mutual fund when its price has fallen.
The theory is that the temporary drop presents a good opportunity to purchase more stocks at a lower price, thereby boosting your return on those extra shares. You’re profiting from people panicking and selling even though there’s nothing fundamentally wrong with the asset. To put it another way, for those of you who are bargain shoppers, stocks are on sale.
This strategy took an interesting twist in 2020, when market dips resulted in a spike in first-time investors, according to a report by the Financial Industry Regulatory Authority Investor Education Foundation and National Opinion Research Center at the University of Chicago. These investors, who opened taxable, nonretirement investment accounts via online brokers, were younger, earned less and were more racially diverse than more experienced investors. They opened accounts because dips in the market made stocks cheaper to buy, the report found.
Dan Egan, vice president of behavioral finance and investing for Betterment, a digital investment advisory firm, understands why people may want to “buy the dip.’’ It can motivate risk-averse individuals to enter the market.
According to Egan, buying when equities are lower-priced is fine, as long as it’s a minor tactical shift on top of a steady investing strategy.
“Getting in at a slightly lower price can feel good, but doesn’t dramatically change your long-term returns,’’ he said. “To do that, you also need to sell before a drop and get back in at a good time. And timing getting out is pretty difficult, as drops happen fast upon bad news being released.’’
If stocks are cheap because a serious long-term problem — such as tariffs leading to a trade war — is pulling markets down, it makes sense to buy only if that problem is soon corrected, he notes. Otherwise, if the crisis persists, a temporary dip might turn into a slump.
The largest and most terrifying dips happen when the economy is in bad shape, Callie Cox, chief market strategist for Ritholtz Wealth Management, points out.
But it’s impossible to know when the market will hit its lowest point during a particular period, leaving many people waiting for the right time to buy.
Since the 1950s, the S&P 500 has dropped an average of 31 percent in a recession, Cox said. Such sell-offs have lasted an average of 14 months.
“I’m worried that we’re at the start of what could be an economic crisis,’’ Cox said. “We’re not there yet, but the ingredients are coming together.’’
Her advice: “Be careful about throwing an unusually large amount of money in this market if you expect to need it in the next few years.’’
Periods like this underscore why you should be cautious about buying and selling based on short-term volatility or solely purchasing after price declines.
Here’s what we have told our young adult children: Use the tried-and-true dollar cost averaging investing strategy.
Instead of putting all your money in at once, you decide on a fixed amount to invest regularly – for example, $250 a month – regardless of whether the asset’s price increases, decreases, or remains the same. Over time, this can help lower the average price you pay for your investments. Dollar cost averaging in practice might look like the following for a young investor:
When the price is low: Your $250 buys you more shares.
When the price is high: Your $250 buys you fewer shares.
This approach helps avoid the pitfalls of making emotional investment decisions during market downturns because you adhere to a consistent investment schedule. Or as Cox put it: “You give up the burden of having to guess what the market will do next.’’
My husband and I didn’t advise our daughter to invest now simply because stock prices have decreased. Instead, we emphasized that, given her age and the longtime horizon she has to navigate market fluctuations, she should see this as a favorable time to begin investing.
