It's understandable that investors might see the stock market as non-fertile ground right now!
Is it safe to invest in the stock market today?
'Safe' is a difficult word in relation to investing, because investing inherently involves some risk. Whether you're buying ASX shares, bonds, mutual funds, or bricks-and-mortar real estate, things can go wrong.
Your choices are to leave your money in cash, or invest and mitigate the risks as much as possible.
Examples of good mitigation strategies include buying ASX 200 blue-chip shares only, and diversifying across the 11 market sectors. But the big one is time. Investing success requires time to allow your investments to deliver great returns that reliably grow your wealth for retirement.
Investing for most amateurs should involve long-term thinking. We're not traders; we're investors.
The classic way to go with ASX 200 shares investing is simply buying and holding. Buy high-quality ASX 200 shares and hold them through thick and thin — for decades.
Take your dividend payments as cash to supplement your income, or ideally, reinvest them automatically through dividend reinvestment plans (DRPs) and let compounding do its thing over time.
If you have that approach, then arguably, it's pretty safe to invest at any time. But that's only if you're investing funds you don't need.
That means you have to set up your emergency fund before you start investing with other spare cash.
1 reason to avoid the stock market
Not having an emergency fund in place first is a good reason to avoid ASX shares investing.
As explained in our 'Investing for Beginners' Education Hub, almost all of us will face periods of financial hardship, and it's a great idea to have a nice amount of cash sitting in an account when you do.
The last thing you want to be dealing with when under financial pressure is having to sell your ASX shares to free up cash. You may end up having to sell at a loss, which will cause you even more stress.
Depending on your circumstances, three or six months' worth of living costs is a good guide as to how much you should have in your emergency fund before starting to invest in ASX shares.
It's a good idea to keep your emergency monies in a high-interest savings account or a home loan offset account. That way, your funds are doing something for you while sitting there waiting for an emergency.
3 great reasons to invest in ASX 200 shares today
Inflation, yield, and capital growth
Due to high inflation right now, leaving spare funds in cash is like guaranteeing yourself a negative return in real terms.
Annual inflation in Australia is currently running at about 7%. Over this past year, you might have received 2% to 3% interest. See the disparity? It's a negative return.
Also, remember that cash has no prospect of capital growth. It's a yield play only.
Let's compare your interest received on cash last year to the returns of some top 10 ASX 200 shares.
In 2022, National Australia Bank Ltd (ASX: NAB) shares delivered 4.2% capital growth and paid a 5.4% fully franked dividend yield.
BHP Group Ltd (ASX: BHP) shares increased by 10% and paid a dividend yield of 9%.
Of course, each ASX 200 share will perform differently. But you get my drift.
If you choose high-quality and reliable dividend-paying ASX 200 shares, you'll likely get a better yield than cash in the bank. At least for now, while inflation is very high.
And in the good years, you'll likely pick up some capital gains, too.
ASX 200 share prices are down
The ASX 200 has lost about 6.2% since the start of 2022. That's when people worldwide began worrying about rising inflation and interest rates.
Now, 6.2% doesn't sound like much but remember that's the average over 200 stocks. Some ASX shares have been hit harder by the macroeconomics, with some share prices down by 30%, 40%, 50%, or more.
The best time to buy ASX 200 shares is when they're trading low. That means being brave and buying in uncertain times when the market is volatile. Psychologically, that's hard. But you can potentially make it more palatable by only buying ASX large-cap shares.
These are long-established blue-chip companies that have made it through tough economic periods many times before. Even if market sentiment drags their share prices down now and then, these underlying businesses are very likely to remain strong and simply carry on.
Share price falls are only short-term paper losses if you're holding your ASX shares for the long term. And you keep getting your dividends in the meantime.
The average 10-year return of the ASX 200, including dividends, is 8% per annum.
For advice on how to choose ASX shares, click here.
You won't miss out on the next bull run
No market downturn can last forever. Economies and markets are cyclical, which means you'll have challenging years like we're in now, followed by good years, followed by challenging years.
The factor of time smoothes all this volatility out. Holding for the long term is very easy, and staying in the market during challenging years means you'll be sitting pretty for the next bull run.
Click on the five-year button below to get a good look at the bull run that followed the COVID-19 market crash in 2020. Also click on the 10-year button to see the bull run that followed the downturn in 2018.
Starting your investment portfolio during a challenging market (i.e., today's) can give you a head start on long-term investing success. But we don't know how long current market conditions might continue, nor whether a global recession will eventuate this year.
If you're starting your investment journey today, be mindful that it might be a rocky road for a while. You need to be able to grit your teeth and ride it out.
