When’s the best time to make your first investment?
Not surprisingly, first-time investors usually have a little bit of anxiety about when the best time is to make their first stock purchase. It’s not an unfounded fear, frankly, because if a person were to start at the wrong point in the market, which has a tendency to go up and down quite a bit, they can be left staring at big losses right from the start.
The good news is simply this; time is definitely on your side. If you are investing for the long haul, which is recommended, well-chosen investments will have compounding returns that add up quite well no matter what the market was doing when you decided to purchase your first shares.
Truth be told, rather than worrying about when you should make your first purchase of any stock, you should be thinking about the length of time that you’re planning to leave your money in the market. You probably already know that there are different degrees of risk and return based on the different types of investments and each of those investments is going to be best suited for different lengths of time.
For example, if you’re looking for dependable returns in a shorter period of time, bonds are probably the best way to go. For example, from 1926 through 2003, short-term U.S. Treasury bills yielded approximately 3.7% per year. While this might not sound like a great yield, keep in mind that during this time inflation was practically nonexistent, which means that nearly 4% average was not all that bad until around the late 1960s.
You’ll get slightly higher returns if you invest in longer-term government bonds, on average 5.4% annually during the same time period we just talked about, from 1926 to 2003. That being said, during the 1980s long-term bonds were returning almost 14% but lost 4% per year during the 1950s, proving that they are a bit more volatile.
Large-cap stocks have shown to be quite good for investors , returning an average of 10.4% per year during the same time period as above, which is a sight better than bonds. Although they suffered a slight decline in the 1930s, bonds did particularly well during the 1950s when they were getting an average annual return of 18%, during the 1980s when it was 16.6% and then again during the 1990s when it was 17.3%
Okay, so we’ve looked at the types of investments you can make and we’ve talked about their average annual return. Now it’s time to talk about the most important factor for amassing more cash with your investments; time.
As you probably already know, or at least should, the longer you can leave your investments alone the greater return on that investment you will have and the greater amount of risk you can take as well since, if things do go bad for a while, you can wait it out until the market returns.
Again, it’s not really the timing of when you make your first investment but the amount of time that you will leave your investments in the market. The market goes up and down more often than the tide but, that being said, the longer you leave your investments alone the better chance that they will do well and bring you an excellent return when you’re finally ready to cash out.
Filed under: Investing
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