Why you should think about investing in 2021
The year has barely started and already we can say that it may be a bumpy ride.
Between new lockdowns and increased worry, many people may be tempted to delay the decision of starting to invest, or to pull out their funds altogether.
It’s normal to think like this. In times of uncertainty and looming hardship, thinking if this is the time to invest is a legitimate and timely concern. This does not mean, however, that you let your decisions be guided by fear. And when it comes to your finances, adding an objective perspective can help you better understand your current situation.
After you do, it is time to understand the reasons why investing is important, not only in times of optimism and favorable conditions, but also when the overall economic context can feel to be working against you.
Investments and the economy don’t always go hand to hand
Have you noticed that some markets thrive even if the global economy faces adverse conditions?
It can be puzzling, but let’s take a look at the state of the economy in the USA and the respective stock market, here represented by the S&P 500, an index comprising the 500 largest publicly traded companies in the US, including Apple (average stock price US$130), Microsoft (average stock price US$215) and Amazon (average stock price US$3170) at the top 3 positions in 2020.
Now, while from Feb-Mar 2020 that index took a significant following the news concerning the pandemic, it experienced a quick recovery, despite the fact that the country had officially entered a recession.
One reason contributing to this is the time disconnect between markets and the economy. While the economy is about the current situation, markets deal more with expectations for the future. Which is why stock markets in general show deal with high degrees of volatility and are greatly affected by developments in the news cycle.
On the other hand, these indexes are not an actual representation of the average company in the economy, leaving out many small and medium enterprises.
And it should also be kept in mind that there are some sectors that are better prepared to face changing conditions than others.
Because of this, having one foot in the market and another in the economy can help offset adverse effects from one side of the equation.
It’s not a sprint - it’s a marathon
And like any marathon, you won’t be peaking at all times. There will be ups and downs. It is not a matter of trying to figure out if you will have losses, but how you are going to deal with them.
More than that, by resisting the knee-jerk reaction of pulling out when things are going down, you will be depriving yourself of every potential gain to be had. Every time your money is not working for you, you are wasting potential.
It has more to do with long term trends rather than what is happening in the immediate moment. Taking your funds out of investments can seriously hinder the effect of compound interest in wealth building.
In short, if your money stops running when things look down, it won’t run as far when they go back up.
A crisis is a terrible thing to waste
Yes, it can be a turbulent time, but also a time filled with innovation and opportunity.
While changing conditions need to be accounted for, they must not be seen as a wall in your way, but as a hurdle to overcome.
Sitting out during this time can feel safer, but it is a waste in what you could be able to achieve.
You are able to keep building wealth and going for your financial goals, and there are many available options that aim for stability with different timeframes.
That’s the way to think about investing, and any other big goal: one step at a time.
Help your friends take another step! Share this with them and move forward together.