Despite a decent rebound in July, the Nasdaq composite is still down nearly 24% from its recent highs. That kind of volatility is enough to spook even veteran investors, and it raises key questions on what to do next. Indeed, one key question is whether it is safe to invest in the Nasdaq right now, or whether things could get worse.
The direct answer is simple: No it is not safe to invest in the Nasdaq right now. Then again, it’s never “safe” to invest in stocks, particularly in the short term. The real question you should be asking is whether you’re really in a spot to where you should be investing in the Nasdaq.
How to tell if you’re in a good spot to invest in the Nasdaq
There are three key things you need to consider when it comes to whether you should be investing in any stocks at the moment. They are your personal balance sheet, your personal cash flows, and your time horizon until you need the money.
Let’s start with the easiest one: time horizon. If you’re looking for a “get rich quick” opportunity from your investments, then investing in stocks is never a good idea. Stock market returns are never guaranteed, but a good rule of thumb is that it takes a five year time horizon for stocks to have a decent chance of delivering returns in line with long-term expectations.
For money you know you need to tap in less than five years, it belongs in higher-certainty assets like cash, CDs, or duration-matched quality bonds. Otherwise, you’re more or less gambling on the market being in a good mood at the time you need to sell your stocks to cover whatever it is you’re looking to buy.
The next important thing to consider are your personal cash flows. You absolutely need more money coming in than going out if you’re looking to invest in the Nasdaq. This is because the average return on stocks is around 10% annualized.
If you’re regularly spending more money than you’re earning, chances are that it’s costing you more than that in interest to keep the spending going. Focus first on getting your costs down, then get yourself in the position where you can invest. Tackling things in that order gives you a much better shot of truly building wealth over time.
Finally, there’s your personal balance sheet. Stuff happens, and your bills come due even in times when the stock market is down. Your debts should be in control, and you should have at least a small emergency fund in a savings account before you start aggressively investing. This makes it less likely that you will be forced to sell your stocks at an inopportune time just to cover a surprise bill. That gives you a better chance of making it to that long-term time frame with your stock investments.
But what about the market itself?
Of course, none of that changes the fact that the Nasdaq is down nearly 24%. Well, from one perspective, that decline actually makes now a better time to buy than when the Nasdaq was substantially higher. After all, when you’re buying stocks, you’re trading your cash for shares. If, at the high, you were paying $100 per share, you’re now paying closer to $76. That means the same number of dollars can buy that many more shares.
Of course, that price is really only a better value if the companies whose shares you’re buying still have strong prospects over time. If their long-term futures have been imperiled by higher interest rates or the softening economic conditions , then it’s likely that their stock declines have been driven by those weakening prospects.
As a result, the recent Nasdaq decline may not be a signal to become an aggressive buyer of anything and everything, but it is a sign that it’s time to start looking for bargains. If you can find businesses whose prospects are strong but whose shares have been knocked down by the Nasdaq’s decline, they just might be worth buying at today’s lower prices.
Get started now
The thing about bargain hunting, however, is that the market rarely lets clear discounts stay value priced for long. As a result, if your personal financial house is in order, now is a great time to start seeking out the bargains that the Nasdaq’s drop may have revealed. If you still need to get your personal financial house in order, there’s no better time than now to get that process under way. Either way, make today the day you get started, and you’ll be setting up a great foundation for a stronger future.